[House Hearing, 106 Congress]
[From the U.S. Government Printing Office]




                               before the


                                 of the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION


                             MARCH 25, 1999


                             Serial 106-11


         Printed for the use of the Committee on Ways and Means


                      U.S. GOVERNMENT PRINTING OFFICE
 58-310 CC                   WASHINGTON : 1999
                   For sale by the U.S. Government Printing Office
 Superintendent of Documents, Congressional Sales Office, Washington, DC 20402

                      COMMITTEE ON WAYS AND MEANS

                      BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Illinois            CHARLES B. RANGEL, New York
BILL THOMAS, California              FORTNEY PETE STARK, California
E. CLAY SHAW, Jr., Florida           ROBERT T. MATSUI, California
NANCY L. JOHNSON, Connecticut        WILLIAM J. COYNE, Pennsylvania
AMO HOUGHTON, New York               SANDER M. LEVIN, Michigan
WALLY HERGER, California             BENJAMIN L. CARDIN, Maryland
JIM McCRERY, Louisiana               JIM McDERMOTT, Washington
DAVE CAMP, Michigan                  GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota               JOHN LEWIS, Georgia
JIM NUSSLE, Iowa                     RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas                   MICHAEL R. McNULTY, New York
JENNIFER DUNN, Washington            WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia                 JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio                    XAVIER BECERRA, California
PHILIP S. ENGLISH, Pennsylvania      KAREN L. THURMAN, Florida
WES WATKINS, Oklahoma                LLOYD DOGGETT, Texas
J.D. HAYWORTH, Arizona
RON LEWIS, Kentucky

                     A.L. Singleton, Chief of Staff
                  Janice Mays, Minority Chief Counsel


                    Subcommittee on Social Security

                  E. CLAY SHAW, Jr., Florida, Chairman

SAM JOHNSON, Texas                   ROBERT T. MATSUI, California
MAC COLLINS, Georgia                 SANDER M. LEVIN, Michigan
ROB PORTMAN, Ohio                    JOHN S. TANNER, Tennessee
J.D. HAYWORTH, Arizona               LLOYD DOGGETT, Texas
JERRY WELLER, Illinois               BENJAMIN L. CARDIN, Maryland
JIM McCRERY, Louisiana

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.

                            C O N T E N T S



Advisory of March 18, 1999, announcing the hearing...............     2


U.S. General Accounting Office, Hon. David M. Walker, Comptroller 
  General........................................................     7
Social Security Administration, Stephen C. Goss, Deputy Chief 
  Actuary, Office of the Chief Actuary...........................    37


Center on Budget and Policy Priorities, Wendell Primus...........    60
Employee Benefit Research Institute, Dallas L. Salisbury.........    46
Enoff Associates, Sykesville, MD, Louis D. Enoff.................    70

                       SUBMISSIONS FOR THE RECORD

Lowry, David B., Portland, OR, letter............................    83
Retired Public Employees Association, Inc., Albany, NY, Cynthia 
  Wilson, statement..............................................    83
Richard Weede Photography, Escondido, CA, Richard Weede, letter..    84



                        THURSDAY, MARCH 25, 1999

                  House of Representatives,
                       Committee on Ways and Means,
                           Subcommittee on Social Security,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 10 a.m., in 
room 1100, Longworth House Office Building, Hon. E. Clay Shaw, 
Jr. (Chairman of the Subcommittee), presiding.
    [The advisory announcing the hearing follows:]




FOR IMMEDIATE RELEASE                          CONTACT: (202) 225-9263
Date March 18, 1999
No. SS-5

                       Shaw Announces Hearing on
                Social Security's Goals and Criteria for
                           Assessing Reforms

    Congressman E. Clay Shaw, Jr., (R-FL), Chairman, Subcommittee on 
Social Security of the Committee on Ways and Means, today announced 
that the Subcommittee will hold a hearing on the Social Security 
program's goals and criteria for assessing reform proposals.The hearing 
will take place on Thursday, March 25, 1999, in the main Committee 
hearing room, 1100 Longworth House Office Building, beginning at 10:00 
    Oral testimony at this hearing will be from invited witnesses only. 
Witnesses will include representatives of the U.S. General Accounting 
Office and the Social Security Administration Office of the Actuary, 
and other program and pension experts. However, any individual or 
organization not scheduled for an oral appearance may submit a written 
statement for consideration by the Committee and for inclusion in the 
printed record of the hearing.


    Despite its remarkable success in combating poverty among the 
elderly, Social Security faces increasing hurdles in paying promised 
benefits in the coming years. As Social Security's Trustees stated in 
their April 1998 report, ``Beginning with the year 2013, the tax income 
projected under present law is expected to be insufficient to cover 
program expenditures.'' By the year 2032, when the Trust Funds are 
projected to be depleted, tax collections will cover only 72 percent of 
benefit obligations. The U.S. General Accounting Office has reported 
that maintaining solvency would require immediate across-the-board 
benefit cuts of 14 percent or tax hikes of 16 percent. If changes are 
delayed until the year 2032, benefit cuts of 45 percent or payroll tax 
hikes of 25 percent or more would be required to maintain solvency.
    In the face of these challenges, a number of proposals have been 
made to reform Social Security's financing, benefits, or both. 
Proposals vary on policy specifics, with some stressing benefit cuts, 
tax increases, or some combination. More recently, some proposals, 
including the reform ``framework'' offered by the President, have 
suggested relying on budget surpluses to extend program solvency. In 
general, reform proposals claim to reinforce Social Security's 
fundamental purposes and goals, while preserving the program for future 
workers and families.
    As the Subcommittee assesses the impact of alternative solutions to 
Social Security's financing problems, it needs to gain an appreciation 
of the effects that changes to Social Security will have on the 
economy, national savings, the Federal budget, and the retirement 
security of every participant.
    In announcing the hearing, Chairman Shaw stated: ``Social Security 
impacts the lives of nearly every American and has a direct effect on 
the economy and the Federal budget. Ultimately, we must decide what are 
the most important criteria to use in evaluating specific proposals to 
ensure Social Security's future. As we move forward, we should 
constantly focus on Social Security's original goals. And by 
considering reform proposals in that light, we will know whether or not 
we are staying true to the vision of our parents and grandparents that 
has worked so well for generations.''


    The Subcommittee will hear the views of a wide range of experts in 
retirement policy regarding the fundamental goals of the current Social 
Security program and criteria to use when evaluating options for Social 
Security reform.


    Any person or organization wishing to submit a written statement 
for the printed record of the hearing should submit six (6) single-
spaced copies of their statement, along with an IBM compatible 3.5-inch 
diskette in WordPerfect 5.1 format, with their name, address, and 
hearing date noted on a label, by the close of business, Thursday, 
April 8, 1999, to A.L. Singleton, Chief of Staff, Committee on Ways and 
Means, U.S. House of Representatives, 1102 Longworth House Office 
Building, Washington, D.C. 20515. If those filing written statements 
wish to have their statements distributed to the press and interested 
public at the hearing, they may deliver 200 additional copies for this 
purpose to the Subcommittee on Social Security office, room B-316 
Rayburn House Office Building, by close of business the day before the 


    Each statement presented for printing to the Committee by a 
witness, any written statement or exhibit submitted for the printed 
record or any written comments in response to a request for written 
comments must conform to the guidelines listed below. Any statement or 
exhibit not in compliance with these guidelines will not be printed, 
but will be maintained in the Committee files for review and use by the 
    1. All statements and any accompanying exhibits for printing must 
be submitted on an IBM compatible 3.5-inch diskette in WordPerfect 5.1 
format, typed in single space and may not exceed a total of 10 pages 
including attachments. Witnesses are advised that the Committee will 
rely on electronic submissions for printing the official hearing 
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
    3. A witness appearing at a public hearing, or submitting a 
statement for the record of a public hearing, or submitting written 
comments in response to a published request for comments by the 
Committee, must include on his statement or submission a list of all 
clients, persons, or organizations on whose behalf the witness appears.
    4. A supplemental sheet must accompany each statement listing the 
name, company, address, telephone and fax numbers where the witness or 
the designated representative may be reached. This supplemental sheet 
will not be included in the printed record.
    The above restrictions and limitations apply only to material being 
submitted for printing. Statements and exhibits or supplementary 
material submitted solely for distribution to the Members, the press, 
and the public during the course of a public hearing may be submitted 
in other forms.

    Note: All Committee advisories and news releases are available on 
the World Wide Web at ``http://www.house.gov/ways__means.''

    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.


    Chairman Shaw. If the Members and our visitors could take a 
seat, we will proceed.
    Good Morning. A wise man once said, ``Laws and institutions 
must go hand-in-hand with the progress of the human mind. As 
manners and opinions change with the change of circumstances, 
institutions must advance also and keep pace with the times.'' 
That wise man was President Thomas Jefferson. His words should 
easily apply to our task of preserving and strengthening Social 
    As a scholar and a lawmaker, I am sure that President 
Jefferson understood the need to have sound criteria for 
assessing government changes and their impact. That is the 
topic of our hearing today. We have a distinguished, almost 
Jeffersonian, group of witnesses to help us think about how to 
evaluate Social Security reform and proposals.
    Many questions are on my mind as we proceed today and in 
the coming weeks. How will the various proposals affect the 
retirement security of all Americans, the economy, national 
savings, and the Federal budget? Do certain proposals raise 
taxes? Do certain proposals cut benefits; raise the retirement 
age? Should we be concerned that under the President's plan 
Congress would still have to vote to raise the debt ceiling in 
2 years? Should we be concerned that under the President's plan 
we are faced with the problem of raising taxes or cutting 
benefits in 2013?
    We have to analyze every plan very carefully. We shouldn't 
just save Social Security for the next election. We must and 
will save it for the next generation. There are just a few of 
the important questions to be answered. In the end, though, we 
must remain true to Social Security's original goals: 
guaranteeing lifetime benefits, protecting all families--
especially low-income families--against death and disability, 
and guarding against inflation.
    As I have said before, our challenge is to find a way to 
preserve these core features while keeping Social Security 
sustainable and affordable for our children and our 
grandchildren. That is a tall order, but one we can and we must 
achieve. In recent weeks, we have joined together to pledge to 
avoid raising taxes or cutting benefits to maintain solvency. 
This week, the House and Senate will collectively agree on 
reserving 100 percent of the Social Security surplus--even more 
than the President--for saving Social Security and Medicare. 
Hopefully, we can expand on these measures and build on the 
framework the President laid out to keep the ball moving 
forward in the weeks and the months ahead.
    Before turning to Mr. Matsui for his opening statement, I 
would like to point out something about the President's plan. 
Yesterday, not a single U.S. Senator voted for President 
Clinton's plan to have the government invest Social Security 
dollars in the stock market. Not a single one. So, 45 
Democratic Senators, each and every one of them, said that the 
President's Social Security plan in that regard was wrong, and 
that it was the wrong way to go.
    This is a good bipartisan beginning. We must be able to 
examine, in a very objective way, all proposals, no matter if 
they come from the Democratic side of aisle, the Republican 
side of the aisle, or from the White House.
    Mr. Matsui.
    Mr. Matsui. Thank you, Mr. Chairman. I appreciate your 
holding these hearings. I do wish that we can get these same 
witnesses back, and perhaps they can testify in a similar 
fashion after Chairman Archer and you actually introduce your 
bill. Then we can have something to make comparisons.
    As you indicated, there was a vote in the Senate yesterday 
on a 99-to-0 vote to prevent--or at least a precatory motion to 
prevent--the President's proposal in terms of government 
investment in the market from becoming law. It was kind of a 
meaningless act, but, nevertheless, it did have some relevance 
to it. We really need to have some comparison. Because unless 
and until we have some comparison, we are basically working 
pretty much in a vacuum.
    I really look forward to seeing the document that you and 
Chairman Archer plan to introduce. Perhaps we can have the same 
kind of vetting system for that legislation as we had for the 
    In the meantime, I am assuming we have to deal with the 
Feldstein plan. I keep hearing rumors that the Feldstein plan 
is the one that the plan that you and Chairman Archer plan to 
introduce is based upon. Perhaps we can enter into that debate 
    I might just point out that there are essentially four 
matters that we have to look at with respect to any reform 
proposal: one, the degree to which it increases national 
savings; two, the extent to which it maintains fiscal 
discipline; three, the capacity that it creates for the Nation 
to address other important pressing priorities; and four, its 
success in preserving Social Security's fundamental social 
insurance character.
    These four criteria and the criteria that Mr. Walker talked 
about, and others that people will be talking about this 
morning, are very important. But, then, it really comes down to 
some fundamental questions. Social Security provides a safety 
net for our senior citizen population. We have estimated that 
today anywhere from 35 to 50 percent of the seniors would be in 
poverty without Social Security. In addition to that, it 
provides a safety net in case the breadwinner in a family 
should die. The surviving spouse and the children will have, at 
least, some minimum level of sustenance, should that occur. 
Social Security pays for that. Also, if the breadwinner becomes 
disabled, a family is able to at least get by with Social 
Security benefits through the disability payment system. 
Disability and survivors benefits are about one-third of the 
entire Social Security payout.
    Any system would have to take into consideration those 
factors, as well as the four or five criteria that the Chairman 
mentioned. Mr. Walker, I think, has 6 or 7 or maybe up to 10, 
and the four that I mentioned as well. I hope these issues are 
adequately addressed. Perhaps as the speakers testify and 
critique the President's plan, they perhaps will critique the 
Feldstein plan as well, in fairness to this particular process. 
Unless we see this in comparison, we really won't know how to 
address this fundamental issue.
    We all realize that we do want to deal with Social Security 
this year. Although time is running short, I understand that 
Chairman Archer and Mr. Shaw plan to introduce a bill. I hope 
it is, as they say, sometime before May. The calendar year is 
moving. We are starting to work on our appropriations bill. We 
will pass, presumably, a budget today. Once we get into the 
appropriations process, it is really hard to focus the mind on 
something as big and as significant as Social Security, that 
affects almost every family in America.
    I look forward to this. I look forward to working with 
those helping to, at least, discuss and develop standards and 
criteria. On the other hand, I would hope that when the plan 
offered by the two Chairs is before us, we have the same kind 
of opportunity to review those plans as well. Thank you.
    Chairman Shaw. Bob, I would just like to clear one thing 
up. I, too, am hopeful that there will be a plan in place for 
this Subcommittee to start studying before the end of next 
month. I would also invite you and the Democrats to put forth a 
plan and we will give you the same courtesy, I can assure you. 
Or we invite you to examine whatever plan we might come up 
with. Hopefully, we can get together in a bipartisan manner.
    I think these things are starting to evolve. I think people 
are beginning to realize--I think the American people are very, 
very aware of what we are doing. I think today we can say the 
third rail of politics is for Congress to do nothing. I think 
that would be the tragedy of this Congress.
    I intend to aggressively put forward--and work toward a 
Social Security plan that I am confident will be in place, not 
only for our children, but also for our grandchildren. I 
welcome you to join with us.
    Mr. Matsui. I appreciate this. If the Chair would yield to 
me for just a moment, I don't want to prolong this debate. We 
do want to hear from our witnesses.
    Chairman Shaw. I am not debating.
    Mr. Matsui. Well, it sounds to me that there was a little 
challenge in that. But that is OK. I am really looking forward 
to the Chair and, again, Chairman Archer's proposal. I think we 
spent the last 3 months--90 days, believe it or not--critiquing 
the President; now about 30 hours of hearings just criticizing 
the President's proposal. It, surprisingly, has stood up pretty 
well, in spite of all those criticisms. Now we need to see some 
other proposals out there. It is just a question of maybe a 
little leadership; you know, rolling up our sleeves and sitting 
down and seeing if we can come up with something. We need to 
see a proposal. I appreciate the fact the you are going to try 
and get one before the end of the month. I hope that time 
doesn't slip, because we really are running out of time.
    Chairman Shaw. Does the President really have a proposal 
that is out there? I know he has thrown out a couple of ideas. 
Is he going to bring a bill to us or a complete proposal?
    Mr. Matsui. There will be a bill. It is more than a couple 
of ideas. I think we all know that. We would not have spent 30 
hours on it if it was just a couple of ideas. We have spent a 
lot time on the President's proposal.
    Chairman Shaw. I want to make one thing very clear. I give 
the President high marks for bringing forward the concept that 
somehow in this mix we are going to have to change the 
investment structure of Social Security retirement funding. He 
did that. I know that it was controversial. I think that, by 
his having done that, he is going to make it easier for us, on 
both sides of the aisle, to bring a plan forward that won't 
appear to be radical. It will appear to be sensible and will be 
sensible, and will be drawn in a most careful manner. So, I do 
give the President high marks for that.
    I have been very careful not to trash the President and his 
proposal. Every time I do make some comment that isn't 
altogether with the President, I am always very careful to 
point out that he has opened the debate on investment in the 
private sector, which I feel is an important contribution to 
the debate.
    Mr. Matsui. And I would say, Chairman Shaw, I agree. You 
have been very, very even-handed in your comments and critique 
of the President's proposal. Not all of your Members on your 
side of the aisle have, but at least you have. I thought and 
feel you have been reasonably restrained. So, I appreciate 
    Chairman Shaw. I thank you and hope you feel that way at 
the end of the debate, and if and when we are joined in hands, 
hopefully, in going forward with a proposal that I think all of 
us can embrace.
    For our first witness this morning, we have Hon. David 
Walker, who is Comptroller General of the United States. He is 
no stranger to this Subcommittee and it is a pleasure to 
welcome you back. Mr. Walker.


    Mr. Walker. Thank you, Mr. Chairman and Members of the 
Subcommittee. I would ask that my full statement be entered 
into the record.
    Chairman Shaw. Without objection, the full statements of 
all the witnesses today will be placed in the record. The 
Subcommittee would invite each witness to summarize. Thank you.
    Mr. Walker. I appreciate, Mr. Chairman, the opportunity to 
come back before this Subcommittee in the ongoing discussion on 
how best to ensure the long-term viability of the Social 
Security program.
    As you know, Social Security forms the foundation of our 
retirement income system. In looking at reform, we need to 
consider that it provides benefits that are critical to the 
well-being of millions of Americans. A wide array of proposals 
have been put forth to restore this program's solvency. The 
Congress will need to determine which proposals best reflect 
our country's goals for this important national program.
    Today, I would like to provide an analytic framework for 
assessing any proposal that might be put forth. I would like to 
begin by discussing the purpose of the Social Security system; 
the role that the program currently plays and certain criteria 
and questions that should be considered in assessing any reform 
proposal. I would like to, then, talk about certain other 
elements, including appropriate benchmarks that are necessary 
to compare any reform proposal, too.
    Mr. Chairman, we have to keep in mind that the current 
Social Security program has certain promised benefits, but 
those promised benefits are not adequately funded. Therefore, 
in comparing any particular reform proposal, in fairness, we 
need to make sure we are comparing apples to apples--not 
unfunded benefits--as the basis for doing all the comparisons.
    My statement today is based on work that GAO has already 
done and work that we have ongoing for this Subcommittee. I do 
not take any position, nor does GAO, on any particular element 
or any particular proposal. That would be inappropriate. 
Candidly, what we are trying to do, Mr. Chairman, is to try to 
help the Congress by providing a framework for moving forward 
to get action, hopefully, in this Congress on this important 
    While there are many reform proposals with a wide range of 
features and options, all proposals to restore long-term 
solvency involve some combination of modifying benefits, 
raising revenues, or capturing increased returns from investing 
contributions. We will face many difficult choices in making 
Social Security not only solvent, but sustainable over the long 
term. Our strong economy gives us a historic opportunity to 
address this problem.
    Focusing on comprehensive packages of reforms that protect 
the benefits of current retirees while achieving a balance of 
equity and adequacy for future beneficiaries will help us to 
foster credibility and acceptance. This is the best way to meet 
our obligations and achieve the overarching goal that we seek, 
which is to ensure the retirement income security of not only 
current, but future generations of Americans.
    I am going to skip, now, several things in my testimony, 
Mr. Chairman. I think the first thing we have to recognize is 
the importance of Social Security as the foundation of 
retirement security. In my testimony, under figure 1, we talk 
about the percentage of benefits that Social Security 
represents for many Americans. All too many Americans rely upon 
Social Security as their primary or sole means of retirement. 
We note in figure 2, the tremendous job that Social Security 
has done in helping to contribute to reduce poverty rates among 
the elderly. We talk about the declining ratio of workers to 
retirees in figure 3, which is the demographic problem that we 
face. In figure 4, we note the difference between the projected 
OASDI income and the cost rates, which illustrates the 
financing imbalance that we face in this program.
    Having looked at the background information, which I would 
commend to you, I think it is important now to look forward. 
Over the course of the last several years, various reform 
proposals have been crafted with specific goals in mind, 
articulated in terms of solvency, economy, individual equity, 
and income adequacy. Two primary criteria have been used to 
evaluate these proposals: the extent to which they achieve 
sustainable solvency and what their effect would be on the 
economy and the budget, and the balance that they strike 
between the twin goals of individual equity and income 
    These are two important elements, but I would add a third: 
the details. The details do matter. That is, how would such 
changes be implemented, administered, and explained to the 
public? That is a critical third dimension that, I believe, 
must be addressed in connection with any Social Security reform 
    With regard to the first element, crafting a sustainable 
solution to Social Security's financing problem involves more 
than ensuring long-range actuarial balance, although actuarial 
balance is a goal that we should achieve. It also means making 
sure that the program is sustainable into the future, and that 
we deal with the so-called ``cliff effect'', where as time 
passes, each year that is eliminated is a ``good year''--a 
surplus year for Social Security--and is replaced at the 75th 
year with a big deficit year. So, we are taking off a good one 
and adding a bad one every year. Figure 6 graphically 
demonstrates that in a fashion that, I think, should be 
    The second element is balancing equity and adequacy in the 
benefit structure. The current Social Security system's benefit 
structure is designed to address the twin goals of individual 
equity and retirement income adequacy. Differences in how 
various proposals balance these competing goals will help 
determine which proposals will be acceptable to policymakers 
and the public. To restore solvency only via changes to current 
benefits or payroll taxes would reduce the implicit rates of 
return that future cohorts or beneficiaries will receive on 
their contributions. This would serve to reduce individual 
equity, and depending upon which exact measures are taken, to 
compromise adequacy as well.
    The third element--implementation, administration, and 
public understanding--forms another important area to consider. 
Although some consider these issues merely technical or 
routine, compared with macroeconomic or other policy concerns 
associated with benefit adequacy and financing, implementation 
and administration issues are important. They have the 
potential to delay, if not derail, reform if they are not 
adequately considered and properly planned. Moreover, such 
issues can influence policy choices, both as to feasibility and 
cost. As a result, they should be integral factors in the 
ultimate decisions regarding the Social Security program.
    In addition, potential transparency and public education 
needs associated with various reform proposals should be 
considered. Reforms that are not well understood could face 
difficulties in achieving broad-based acceptance and support. 
Regardless of the reform proposal being considered, there will 
also be a need for enhanced public education. While any changes 
to the Social Security program must be explained to the public, 
the need would be especially acute if individual accounts were 
a feature of the chosen reform package. Public understanding 
may not necessarily bring about public acceptance of Social 
Security reform, but the credibility of any reform package will 
be enhanced to the extent that the American public understands 
the changes being made and the impact that these changes will 
have on their personal retirement planning.
    In conclusion, Mr. Chairman and Members of the 
Subcommittee, restoring solvency to the Social Security system 
is a formidable challenge. Addressing it in a sustainable 
fashion today could help us to avoid similar challenges in the 
future, rather than leaving difficult choices for our children. 
The health of our economy and the projected budget surpluses 
offer us a historic opportunity to meet these challenges from a 
position of financial and economic strength. Such good fortune 
can, indeed, help us to meet our historic responsibility--and 
our fiduciary obligation, if you will--to leave our Nation's 
future generations a financially sustainable and sound system.
    We must also move forward to address Social Security 
because we have other equally serious and, in fact, more 
challenging issues to address, namely, healthcare financing. 
Reforming Social Security will be easy lifting as compared to 
reforming Medicare. It is critically important that we get on 
with Social Security because that is a solvable problem.
    We have offered three basic criteria to use in considering 
reform proposals. I would commend to the Members a series of 
questions that are attached as an exhibit, key questions which 
we believe should be asked about every reform proposal in order 
to have a common foundation to analyze the pros and cons. 
Obviously, different Members will feel that different questions 
are more important than others. In the end, we believe it is 
critically important to consider reform proposals as a package. 
We are very concerned that a tremendous amount of time and 
attention is placed on debating single elements, rather than 
looking at comprehensive packages.
    We believe it is critically important to have a framework 
to analyze comprehensive packages because, as you know, there 
are tradeoffs in packages. In many cases there are interactive 
effects of individual elements, and some can serve to smooth 
some of the hard edges associated with those elements.
    We believe, Mr. Chairman, that it is possible for this 
Congress to exceed the expectations of all generations of 
Americans in conjunction with Social Security reform. Why do I 
say that? Because the people that are most concerned about 
Social Security reform are today's elderly and near-retirees.
    From a practical standpoint, most reform proposals talk 
about doing little or nothing to affect their benefits. At the 
same point in time, baby boomers such as myself and Generation 
Xers, such as my children, don't have a high degree of 
confidence in the current system. They are discounting their 
benefits under the system to a great degree. Therefore, by 
reforming Social Security in a prudent manner and on a timely 
basis, it is possible to exceed the expectations of all 
generations of Americans.
    Mr. Chairman, the GAO and I stand ready to help this 
Congress move forward in this important area. Hopefully, this 
framework for consideration by the Congress in evaluating all 
reform proposals will prove to helpful. Thank you, Mr. 
    [The prepared statement and attachments follow:]

Statement of David M. Walker, Comptroller General, U.S. General 
Accounting Office

    Thank you for inviting me here today to continue the 
ongoing discussion on how best to ensure the long-term 
viability of our nation's Social Security program.\1\ According 
to the OASDI Trustees' 1998 mid-range estimates, the program's 
cash flow is projected to turn negative in 2013. In addition, 
all of the accumulated Treasury obligations held by the Trust 
Funds are projected to be exhausted by 2032. The financing 
problems facing Social Security pose significant policy 
challenges that should be addressed soon in order to lessen the 
need for more dramatic reforms later.
    \1\ Social Security refers here to the Old-Age, Survivors, and 
Disability Insurance program, or OASDI.
    Social Security forms the foundation for our retirement 
income system and, in so doing, provides benefits that are 
critical to the well-being of millions of Americans. A wide 
array of proposals have been put forth to restore this 
program's solvency, and the Congress will need to determine 
which proposals best reflect our country's goals for a 
retirement income program. Today, I would like to provide an 
analytic framework for assessing these proposals. I would like 
to begin by discussing the purpose of the Social Security 
system. The role that we envision for the program will be vital 
in deciding which proposals to adopt. Next, in response to your 
invitation to me to appear at this hearing, I would like to 
offer what I believe are the basic criteria for assessing 
reform proposals. I would then like to stress that the Congress 
needs to compare reform proposal packages. If we focus on the 
pros and cons of each element of reform, we will get mired in 
the details and lose sight of important interactive effects. It 
will also be more difficult to build the bridges necessary to 
achieve consensus. Finally, I want to point out the importance 
of establishing the proper benchmarks against which reforms 
must be measured. Often reform proposals are compared to 
current promised benefits, but this benchmark, while in some 
ways valid, has some drawbacks. Currently promised benefits are 
not fully financed, and so it might be necessary to use a 
benchmark of a fully financed system to fairly evaluate reform 
    My comments today are based largely on a body of work we 
have published as well as on ongoing work for this Committee. 
It is not my intention to take a position for or against any 
individual reform proposal or elements. Rather, my testimony is 
designed to help clarify the debate on various proposals to 
help the Congress move forward in addressing this important 
national debate. In choosing among proposals, policymakers 
should consider three basic criteria:
     the extent to which the proposal achieves 
sustainable solvency and how the proposal would affect the 
economy and the federal budget;
     the balance struck between the twin goals of 
individual equity (rates of return on individual contributions) 
and income adequacy (level and certainty of benefits); and
     how readily such changes could be implemented, 
administered, and explained to the public.
    While there are many reform proposals with a wide range of 
features and options, all proposals to restore long-term 
solvency involve some combination of cutting benefits, raising 
revenues, or capturing increased returns from investing 
contributions. We will face many difficult choices in making 
Social Security a sustainable program. But our strong economy 
gives us an historic opportunity to address this problem. 
Focusing on comprehensive packages of reforms that protect the 
benefits of current retirees while achieving the right balance 
of equity and adequacy for future beneficiaries will help us to 
foster credibility and acceptance. This is the best way to meet 
our obligations and achieve overarching goal that we all seek--
that is, ensuring the retirement income security of current and 
future generations.

 Difficult Choices Are Necessary To Restore Social Security's Solvency

    In the past few years, as attention has focused on Social 
Security's future financial situation, a wide array of 
proposals have been put forth. Some reduce benefits, some raise 
revenues; most propose some combination to restore financial 
solvency. The more traditional reforms seek to preserve the 
program's structure, restoring solvency through adjusting 
benefit and revenue provisions; others would restructure the 
system by allowing workers to fund at least some portion of 
their benefits through individual accounts. Regardless of 
structure, many proposals rely on capturing increased returns 
from market investments. In evaluating these proposals, it is 
important to understand Social Security's fundamental role in 
ensuring the income security of our nation's elderly and the 
nature, timing and extent of the financing problem.\2\
    \2\ For a discussion, see Social Security: Different Approaches for 
Addressing Program Solvency (GAO/HEHS-98-33, July 22, 1998).

Social Security Is the Foundation of Our Nation's Retirement 
Income System

    Social Security has long served as the foundation of our 
nation's retirement income system, which has traditionally been 
comprised of three parts: Social Security, employer-sponsored 
pensions (both public and private), and personal savings.\3\ 
Social Security provides a floor of income protection that the 
voluntary forms of employer pensions and individual savings can 
build on to provide a secure retirement. However, private 
pension plans only cover about one-half of the full-time 
workforce, and a significant portion of the American public 
does not have significant personal savings. In addition, Social 
Security is the sole source of retirement income for almost a 
fifth of recipients. (See fig. 1.)
    \3\ For a discussion of this traditional approach to retirement 
income, see Retirement Income: Implications of Demographic Trends for 
Social Security and Pension Reform (GAO/HEHS-97-81, July 11, 1997).
    Given Social Security's importance as the foundation of 
retirement income security, it has been a major contributor to 
the dramatic reduction in poverty among the elderly population. 
Since 1959, poverty rates for the elderly have fallen from 
nearly 35 percent to 10.5 percent. (See fig. 2.)

Figure 2: Poverty Rates for the Elderly, 1959 to 1996 

    Social Security's benefit structure represents a retirement 
income insurance program whereby workers pool the risks 
associated with the loss of earnings due to old age, 
disability, or death. It is a mandatory and almost universal 
program. As a result, the vast majority of American workers 
take Social Security credits with them whenever they change 
jobs. Social Security also provides inflation-protected 
benefits for the life of the retiree. No matter how long they 
live, retirees will continue to receive Social Security 
benefits uneroded by inflation. The program, which provides 
benefits not generally available as a package in the private 
market, includes benefits for retired workers, their spouses 
and dependents, and their survivors as well as for those who 
are disabled.

The Financing Problem Needs to Be Addressed Now 

    The Congress has always taken the actions necessary to 
ensure Social Security's future solvency when faced with an 
immediate solvency crisis. These actions have generally been 
adjustments to the benefit and revenue provisions of the 
program. Today, the program does not face an immediate crisis; 
rather, it faces a long-range and more fundamental financing 
problem due to demographic trends. While the crisis is not 
immediate, it is important to act soon if we are to avoid 
having to unfairly burden future generations with the program's 
rising costs and give these individuals time to make necessary 
adjustments to their retirement planning.
    Social Security's financial condition is directly affected 
by the relative size of the populations of covered workers and 
beneficiaries. Historically, this relationship has been 
favorable, but a major reason we are debating Social Security's 
financing today is that the covered worker-to-retiree ratio and 
other demographic factors--in particular, life expectancy--have 
changed in ways that threaten the financial solvency and 
sustainability of this important national program. (See fig. 

Figure 3: Ratio of Workers to Beneficiaries 

    Thus, while the program was put in 75-year actuarial 
balance just 15 years ago, Trust Fund balances now are 
projected to be exhausted in 2032. In addition, the program 
will begin to experience a negative cash flow in 2013, which 
will accelerate over time. (See fig. 4.) Absent meaningful 
program reform, this will place increased pressure on the 
federal budget to raise the resources necessary to meet the 
program's ongoing costs. To restore the 75-year actuarial 
balance to the program today, we would need to immediately 
increase annual program revenues by 16 percent or reduce annual 
benefit payments by 14 percent across the board.

Figure 4: Social Security Income and Cost Rates 

    Another way to understand the magnitude of the problem is 
to consider what the system will cost as a percentage of 
taxable payroll in the future. Consider what would happen if we 
did nothing and let the Trust Funds be exhausted in 2032, as 
estimated in the 1998 Trustees' report. It would then be 
necessary to find resources in the following year that would be 
more than 37 percent higher than the revenues projected to be 
available under the 12.4 percent payroll tax that currently 
finances the system. (See fig. 5.) Alternatively, we would have 
to reduce benefits in the year following Trust Fund exhaustion 
by 27 percent. Clearly, we must act soon in order to minimize 
the needed changes and maximize the fairness to future 

Figure 5: Changes Needed to Maintain Solvency--Proposals Rely 
on Different Benefit Adjustments and Financing Arrangements

    A variety of proposals have been offered to address Social 
Security's financial problems. Some would reduce benefits by 
modifying the benefit formula (such as increasing the number of 
years used to calculate benefits), reducing cost-of-living 
adjustments (COLA), raising the normal and/or early retirement 
ages, or revising dependent benefits. Others have proposed 
revenue increases, including raising the payroll tax that 
finances the system; increasing the taxation of benefits; or 
covering those few remaining workers not currently required to 
participate in Social Security, such as older state and local 
government employees. A number of proposals would incorporate 
investment returns to increase revenues and to reduce benefit 
cuts, or tax increases that would otherwise be required, or 
    In fact, almost all proposals combine benefit reductions 
and changes designed to gain increased investment returns. The 
proposals differ not only with regard to specific benefit 
changes but also in how investment returns are captured. Some 
would change the Trust Fund's investment policy so that the 
government could purchase equities or other instruments besides 
Treasury securities; others would restructure the Social 
Security system so that participants could invest at least part 
of their own contributions. The latter approach creates 
individual accounts as a means to finance and accumulate future 
benefits, rather than relying entirely on payroll tax financing 
through a centrally managed government trust fund account.
    These proposals also differ in how such increased returns 
would be financed. Some would use a portion of current payroll 
tax collections--a ``carve-out'' from the Trust Fund--while 
others would ``add-on'' federal budget surpluses (that is, 
general revenues) or additional payroll taxes as a means to 
finance either current benefits or individual accounts. These 
choices carry with them implications for individual 
beneficiaries, the Social Security program, the federal budget, 
and the national economy. Such implications should be well 
understood before a policy choice is made.

                    Choosing Among Reform Proposals

    Proposals that restore solvency to Social Security 
necessarily combine several or even a multitude of changes to 
the program. Although these changes are presented in a 
comprehensive package, debate often focuses on individual 
aspects that, on their own, are undesirable. For example, many 
criticize proposals to raise the normal retirement age without 
considering the other, potentially offsetting elements of the 
proposals of which this change would be a part. Although such 
criticisms are legitimate and can contribute to the public 
debate, it is critically important to evaluate the effects of 
an entire package before considering whether these proposed 
changes add up to acceptable program reform. If a comprehensive 
package of reforms meets policymakers' most important goals for 
Social Security, individual elements of the package may be more 
acceptable. After all, individual reform elements can drive 
interactive effects that can tend to smooth the rough edges of 
the individual elements. In addition, it's important to look at 
a complete puzzle before rendering final judgments and 
understand how it would stand up against relevant reform 
criteria. For example, phasing in an increased normal 
retirement age coupled with adding individual accounts could 
result in more flexibility and benefit levels for baby boomers 
and generation Xers compared with the current system.
    Evaluating such packages can be complex, however. What 
factors or elements should such evaluation measure? What weight 
should be placed upon particular factors? I would not presume 
to tell policymakers which factors or elements should prove 
decisive for them in choosing among proposed reform packages. I 
am, however, in a position to suggest what factors to consider 
in making these choices.
    Over the course of the last several years, various reform 
proposals have been crafted with specific goals in mind--
articulated in terms of solvency, the economy, individual 
equity, and income adequacy. Two primary criteria can be used 
to evaluate these proposals: (1) the extent to which they 
achieve sustainable solvency and how their effect on the 
economy and the federal budget and (2) the balance they strike 
between the twin goals of individual equity and income 
adequacy. I would also add a third criterion, which, although 
not addressing a goal of Social Security reform, focuses on the 
important practical aspects of reform--that is, how readily 
such changes could be implemented, administered, and explained 
to the public. These elements provide a basis to address a 
range of more detailed questions (see attachment 1) that help 
describe and measure the potential effects of various proposals 
on important policy and operational aspects of public concern. 
Measuring proposals against these three criteria can help shed 
light on the important choices we face; I will discuss each in 

              Criterion 1: Financing Sustainable Solvency 

    Crafting a sustainable solution to Social Security's 
financing problem involves more than ensuring long-range 
actuarial balance, although actuarial balance is also a goal to 
be achieved. Simply taking the actions necessary to put the 
Social Security system back into an exact 75-year actuarial 
balance could result in having to revisit these difficult 
issues again in the not-too-distant future. For example, if we 
were to raise payroll taxes 2.19 percent--which, according to 
the 1998 Trustees' annual report, is the amount necessary to 
achieve 75-year balance--the system would be out of balance 
almost immediately and the 2013 cash problem I cited earlier 
would move forward only to the year 2020.
    Historically, the program's solvency has generally been 
measured over a 75-year projection period. If projected 
revenues equal projected outlays over the 75-year time horizon, 
then the system is declared in actuarial balance. 
Unfortunately, this measure of solvency is highly transient and 
involves what could be called a ``cliff effect.'' (See fig. 6.) 
Each year, the 75-year actuarial period changes and a year with 
a surplus is replaced by a new 75th year that has a significant 
deficit. As a result, changes made to restore solvency only for 
the 75-year period will result in future actuarial imbalances 
almost immediately.
    Moreover, the problem is not one that is 74 years away 
because the program will begin running annual cash deficits 
long before the trust funds actually deplete their assets. Add 
to this the possibility that adverse economic or demographic 
conditions could accelerate the depletion of the trust funds, 
and the time when the Congress would need to address the 
problem moves even closer. Therefore, simply restoring 75-year 
actuarial balance today could mean that the Congress would have 
to visit these issues again in just 15 or 20 years. In fact, 
today's debate is a testimony to this fact. About 16 years ago, 
the President and the Congress thought they had saved Social 
Security for current and future generations. That reform 
package did save us from the brink of bankruptcy, but it did 
not address the cliff effect.
    Solutions that lead to sustainable solvency are those that 
avoid the need to periodically revisit this difficult issue, 
but they have implications for the risk borne by individuals. 
To the extent that a worker's future retirement benefits are 
funded in advance--in that they will depend on contributions 
and the earnings (rates of return) on those contributions--the 
system is at less risk of insolvency from unfavorable 
demographic or economic trends. While pre-funding benefits has 
obvious advantages with respect to sustainability over the 
largely pay-as-you-go system currently in place, individuals 
bear more risk under such an approach, and the social insurance 
aspects of the program could be weakened.
    Reforms that provide sustainable solvency could also have 
positive effects for the economy at large. To the extent that 
pre-funding worker retirement results in increased savings and 
investment, the overall future economy would be larger, making 
it easier for the nation to support a larger elderly 
population. Simply put, if the dollar that the worker 
contributes today is invested in private assets (stocks and 
bonds), there is a reasonable chance that the dollar will 
contribute to a growing economy. The dollar invested will grow 
in value and provide a return to the owner of the asset. Thus, 
investment returns will, in general, help us finance a given 
benefit in the future more cheaply (that is, with less 
expenditure today) than the way we currently finance Social 
    How the measures to achieve solvency are financed can have 
important implications for the federal budget and the national 
economy. In addition, federal fiscal policy itself can be an 
important element in fostering economic growth. Our work on the 
long-term fiscal outlook shows that replacing deficits with 
surpluses increases national income over the next 50 years, 
thereby making it easier for the nation to meet future needs 
and commitments. Thus, it is important to consider the 
interaction of federal fiscal policy with measures to restore 
program solvency in laying a foundation for a sustainable 
Social Security program. For example, proposals using budget 
surpluses to fund individual accounts, to purchase private 
stocks or bonds for the trust fund, or reduce publicly held 
debt would all have some positive effects on national saving 
and economic growth. Yet, considerable debate exists over the 
relative extent of the economic benefits under these different 
alternatives. Using the projected budget surpluses to reduce 
publicly held debt alone would indirectly make the Social 
Security system more sustainable but would not reform or 
restructure the existing program. I have discussed this at 
greater length before this Committee several weeks ago in the 
context of the President's budget proposals.\4\
    \4\ See Social Security and Surpluses: GAO's Perspective on the 
President's Proposals (GAO/T-AIMD/HEHS-99-96, Feb. 23, 1999).
    Furthermore, some proposals must finance what most analysts 
call ``transition costs,'' and how these are financed matters 
as well. When proposals incorporate some degree of pre-
funding--either via individual accounts or through the current 
program structure--current workers would, in effect, contribute 
both to their own accounts and pay for the benefits of current 
retirees under the existing defined benefit program. The 
resulting incremental transition costs must be financed. If 
transition costs are financed by borrowing or with projected 
budget surpluses, the effects on Social Security participants 
would be mitigated, but the positive effects of pre-funding on 
national saving could be neutralized in the near term by 
additional public borrowing.
    Sustainable solvency is an important criterion in assessing 
reform proposals but may require trade-offs between short-run 
and long-run gains. Further, it is not the only criterion by 
which to evaluate reform proposals. The economic and financing 
considerations that achieve sustainable solvency should be 
measured against equity and adequacy concerns as well. 

Criterion 2: Balancing Equity and Adequacy in the Benefit 

    The current Social Security system's benefit structure is 
designed to address the twin goals of individual equity and 
retirement income adequacy. Individual equity means that there 
should be some relationship between contributions made and 
benefits received (that is, rates of return on individual 
contributions). Retirement income adequacy is addressed by 
providing proportionately larger benefits to lower earners and 
certain household types, such as those with dependents (that 
is, a progressive and targeted benefit structure). Virtually 
all reform proposals address the concept of income adequacy, 
but some place a different emphasis on it relative to the goal 
of individual equity. Differences in how various proposals 
balance these competing goals will help determine which 
proposals will be acceptable to policymakers and the public.
    Policymakers could assess this balance by considering the 
extent to which proposals address the following concerns:
    --Adequacy: (1) adequate benefit levels to protect the 
elderly from poverty and (2) higher replacement rates for 
lower-income workers.
    --Equity: (1) reasonable returns on contributions, (2) 
improved intergenerational equity, and (3) increased individual 
choice and control.
    The weight individual policymakers may place on different 
concerns would vary, depending on how they value different 
attributes. For example, if offering individual choice and 
control is less important than maintaining replacement rates 
for lower income workers, then reform proposals emphasizing 
adequacy considerations might be preferred.
    Each proposal for reform will have an impact on individuals 
and families, whether limited to changes within the current 
program's structure or whether some portion of the program's 
financial gap is to be closed through access to equity markets. 
To restore solvency only via changes to current benefits or 
current payroll tax revenues reduces the implicit rate of 
return that future cohorts of beneficiaries will receive on 
their contributions. (See fig. 7.) This serves to reduce 
individual equity and, depending on what exact measures are 
taken, could compromise adequacy as well. To preserve the 
existing protections and income adequacy for certain types of 
beneficiaries under this approach, it could be necessary to 
reduce the benefits of other types of beneficiaries. To avoid 
such a result, payroll taxes (or the maximum taxable ceiling) 
might be raised, but this could make current or future workers 
worse off. Adding the prospect of additional earnings to the 
system, either from market investment returns or from some 
other external source, could boost individual equity while 
reducing the necessity for other changes to the program, 
depending on how the investment returns or other revenues are 
    In considering this balance, it helps to understand that 
Social Security is currently structured as a defined benefit 
program and that restructuring this program to include 
individual accounts would add, in effect, a defined 
contribution element to the system. Under Social Security, 
workers' retirement benefits are based on lifetime records of 
earnings, not directly on the payroll taxes they contributed. 
Based on the current design of the Social Security program and 
known demographic trends, the rate of return most individuals 
will receive on their contributions is declining. In addition, 
as noted previously, current promised benefits are not 
adequately funded over the 75-year projection period.
    Alternatively, those who propose individual accounts as 
part of the financing solution emphasize the potential benefits 
of a defined contribution structure as an element of the Social 
Security program or financing reform. This approach to Social 
Security focuses on directly linking a portion of worker 
contributions to the retirement benefits that will be received. 
Worker contributions are invested in financial assets and earn 
market returns; the accumulations in these accounts can then be 
used to provide income in retirement.
    Under this approach, individual workers have more control 
over the account and more choice in how the account is 
invested. This control might enable individuals to earn a 
higher rate of return on their contributions than under current 
law. But, of course, these opportunities for higher returns 
exist because the investor assumes some measure of risk that 
the return expected may not actually be realized.
    Some reform proposals incorporating individual accounts 
address the need for protecting individuals and ensuring income 
adequacy by combining the defined contribution and defined 
benefit approaches into a two-tiered structure for Social 
Security. Under such a structure, individuals would receive a 
base defined-benefit amount with a progressive benefit formula 
and a supplemental defined-contribution account benefit. The 
benefit that would be earned through individual account 
accumulations would either be added to a restructured defined 
benefit amount (that is, supplement) or subtracted, in whole or 
in part, from the benefits that would otherwise be provided 
through Social Security's defined benefit structure (that is, 
offset). Either approach could require redesigning the benefit 
structure to ensure the types of protections currently provided 
by Social Security. Such a structure could include a modified 
version of the current defined benefit program or could 
incorporate various types of guarantees based on the current or 
some alternative benefit structure. Such guarantees would, 
however, create contingent liabilities and incremental costs 
for the government.
    Clearly, the number of proposals and features can make it 
difficult to sort out exactly what should be done and what 
effects various actions would have on individuals and families, 
although such effects may represent the most important 
considerations in evaluating reform. It is critical, therefore, 
that the extent to which proposals achieve solvency--admittedly 
an easier criterion to measure--not overshadow the balance of 
equity and adequacy. 

Criterion 3: Implementing and Administering Proposed Reforms 

    Implementation, administration, and public understanding 
form a third important area to consider. Although some consider 
these issues merely technical or routine compared with 
macroeconomic considerations or concerns about benefit 
adequacy, implementation and administration issues are 
important because they have the potential to delay--if not 
derail--reform if they are not considered early enough for 
planning purposes. Moreover, such issues can influence policy 
choices--feasibility and cost should be integral factors in the 
ultimate decisions regarding the Social Security program. In 
addition, potential transparency and public education needs 
associated with various proposals should be considered. Reforms 
that are not well understood could face difficulties in 
achieving broad public acceptance and support.

Feasibility of Implementation and Administration 

    Degrees of implementation and administrative complexity 
arise in virtually all proposed reforms to Social Security. The 
extent to which these issues present true challenges varies 
with the degree to which reform proposals step away from 
current practices. Hence, proposals that would make changes to 
revenues or to benefits without restructuring the current 
defined benefit structure of the program are less difficult to 
implement and less costly to administer than those that would 
create new tiers of benefits or of beneficiaries. For example, 
reducing COLAs, either by improving the accuracy of the 
calculation or by limiting COLA increases directly (such as by 
capping, delaying, or eliminating the COLA) would not require 
significant administrative change. Similarly, raising the 
retirement age, in effect a recalculation of benefits, would 
not represent a large increase in ongoing administrative costs, 
although some implementation costs would accrue and would 
include the costs of educating the public about the changing 
rules. Both these changes, however, would have a ripple effect 
on certain private sector pension and saving plans that are 
integrated with the benefits provided under Social Security. If 
the private sector plan formulas are not adjusted, these 
changes would result in additional benefit costs under the 
private sector plans. Alternatively, to the extent that private 
sector employers act to adapt their pensions to an altered 
Social Security benefit, these actions represent private 
administrative costs as yet unmeasured.
    Allowing the government to invest surplus Social Security 
funds would raise certain implementation issues, the most 
significant of which are investment vehicle and security 
selection and shareholder voting rights; relatively less 
significant concerns regarding cost or complexity would be 
raised. However, these issues could prove controversial to 
resolve because critics have expressed concern about increased 
government involvement in financial markets and corporate 
    \5\ Social Security Financing: Implications of Government Stock 
Investing for the Trust Fund, the Federal Budget, and the Economy, 
(GAO/AIMD/HEHS-98-74, Apr. 1998).
    But there may be ways that we can alleviate some of the 
concerns about government investing. One way would be to 
introduce master trust principles for collective investment of 
base defined-benefit or individual account funds, which would 
be separate from other government funds. In this regard, we 
might be able to replicate or piggyback on a model that seems 
to be working well for federal workers--the Federal Thrift 
Savings Plan. These existing vehicles might help us limit 
concerns about the potential for political manipulation of 
investment decisions and thus foster the credibility needed to 
build bridges to consensus on reforms.
    The greatest potential implementation and administrative 
challenges are associated with proposals that would create 
individual accounts. Not all proposals for individual accounts 
clearly delineate how these accounts would be administered, but 
those that do vary in three key areas:
    --the management of the information and money flow needed 
to maintain a system of individual accounts,
    --the degree of choice and flexibility individuals would 
have over investment options and access to their accounts, and
    --the mechanisms that would be used to pay out benefits 
upon retirement.
    Decisions in these areas could have a direct effect on 
system complexity and who would bear the costs and additional 
responsibilities of an individual account system as well as on 
the adequacy and certainty of retirement income for future 
retirees. Table 1 provides a snapshot of some of the 
administrative functions that would accompany any system of 
individual accounts, the critical decisions associated with 
each function, and a partial list of the options that could be 

               Table 1:--Design and Administration Issues
                                   Critical Decision      Options to
     Administrative Function         or Trade-Off          Consider
Managing the flow of information  Centralized or      --Build on current
 and money.                        decentralized       Social Security
                                   recordkeeping.      tax and payroll
                                                      --Build on
                                                       401(k) structure.
                                                      --Build on
                                                       controlled IRA
Choosing investment options.....  Maximizing          --Offer a small
                                   individual choice   set of indexed
                                   or minimizing       funds.
                                   risk.              --Offer a broad
                                                       range of
                                                      --Combine the two
                                                       options by
                                                       requiring a
                                                       minimum account
                                                       balance before a
                                                       broader range of
                                                       options is
Paying retirement benefits......  Maximizing          --Require lifetime
                                   individual choice   annuities.
                                   or ensuring        --Make annuities
                                   preservation of     voluntary, and
                                   retirement          permit lump sum
                                   benefits.           and gradual
                                                      --Combine the two
                                                       options by
                                                       annuitization to
                                                       ensure at least a
                                                       income, with
                                                       added flexibility
                                                       for remainder of

    Essentially, most decisions about the design of a system of 
individual accounts amounts to trade-offs between individual 
choice and flexibility and simplicity and standardization. For 
example, a centralized recordkeeping system, managed by 
government, could take advantage of existing systems and 
economies of scale but would not offer the wider range of 
alternatives for individuals that a decentralized system would. 
A system of individual accounts that permitted participants 
full and unfettered choice of investments would offer an 
ability to maximize returns but with attendant risk that 
incomes would not be adequate. Alternatively, a more 
centralized investment program, with fewer available choices, 
would be less administratively complex and would protect 
participants from poor investment selection; but it would also 
raise the risk that investment decisions could become 
politicized, depending on the extent of the government's role 
in selecting investment funds and fund managers. Flexibility in 
how funds are withdrawn could allow individuals choice in how 
to manage their own funds but creates administrative complexity 
and risks leaving diminished capital to support an adequate 
income throughout retirement. A full assessment of the 
implications of these trade-offs will be essential to the 
debate on whether and how to implement individual accounts.

Costs of Implementation and Administration 

    Although there are costs associated with most Social 
Security reform proposals, debate has focused largely and 
correctly on the costs of proposals that involve restructuring 
for two reasons. First, administrative costs of changes within 
Social Security's current structure could be relatively 
insignificant, and adding individual accounts to the structure 
creates the potential for much higher implementation and 
administrative costs. For example, there could be substantial 
start-up costs associated with an individual account system. 
Second, the risk of higher administrative costs of individual 
accounts would be borne by individual account holders, directly 
affecting their benefits. Many have expressed concerns about 
the administrative costs of individual accounts and how these 
costs would affect accumulations, especially for the small-
account holder. Each of the reform decisions discussed here 
today can have a significant effect on the costs of managing 
and administering individual accounts, and it will be important 
to consider their effect on the preservation of retirement 
    Administrative costs would depend on the design choices 
that were made. The more flexibility allowed, the more services 
provided to the investor; the more investment options provided, 
the higher the administrative costs would be. For example, 
offering investors the option to shift assets frequently from 
one investment vehicle to another or offering a toll-free 1-800 
number for a range of customer investment and education 
services could significantly increase administrative costs. In 
addition to decisions that affect the level of administrative 
costs, other factors would need to be carefully considered, 
such as who would bear the costs and how they would be 
distributed among large and small accounts.
    To some extent, however, the creation of individual 
accounts could help ease administrative burdens in the future. 
They would represent an infrastructure that could allow workers 
to build up additional savings to meet future retirement income 
and health care cost needs without significant additional 
implementation and administrative costs. For example, workers 
not covered by a private pension could choose to contribute 
more to their individual accounts to augment their retirement 
savings. Workers might also contribute more to their accounts 
to help pay health care costs after they retire. The accounts 
could thereby contribute to overall retirement security, not 
just retirement income security.

Public Understanding 

    Regardless of the reform proposal being considered, there 
will be a need for enhanced public education and information. 
This effort would not focus on educating the public about 
choices for Social Security reform; that process began some 
time ago under congressional and presidential leadership and 
has raised public consciousness not only regarding Social 
Security's financing problems but also of the choices we face. 
Instead, enhanced education and information would serve to 
explain what changes have been adopted so that participants can 
adjust their retirement planning accordingly. Retirement 
planning is, in its nature, a long-term process, and we must 
give Americans not only the time to adapt their plans to a 
reformed Social Security program but also the information 
necessary to do so.
    While any change to the Social Security program must be 
explained to the public, the need would be especially acute if 
individual accounts were a feature of the chosen reform 
package. Not only would participants need to be informed of 
this change, they would also require investor education, 
especially if individual accounts were mandatory. For example, 
individuals would need information on basic investment 
principles, the risks associated with available choices, and 
the effect of choosing among alternatives offered for 
annuitizing or otherwise withdrawing or borrowing accumulations 
from the accounts. This would be especially important for 
individuals who are unfamiliar with making investment choices, 
including those with lower incomes and less education, who may 
have limited investing experience.
    Public understanding may not necessarily bring about public 
acceptance of Social Security reform. But the credibility of 
any reform package will be enhanced to the extent that the 
American public understands the changes being made and the 
impact these changes have on their personal retirement 


    Restoring solvency to the Social Security system is a 
formidable challenge. Addressing it in a sustainable fashion 
today could help us avoid similar challenges in the future 
rather than leaving difficult choices for our children. The 
health of our economy and projected budget surpluses offer an 
historic opportunity to meet these challenges from a position 
of financial and economic strength. Such good fortune can 
indeed help us meet our historic responsibility--a fiduciary 
obligation, if you will--to leave our nation's future 
generations a financially stable system. We must also move 
forward to address Social Security because we have other, 
equally serious obligations before us--compared to addressing 
the health-care financing problem, reforming Social Security is 
easy lifting.
    Today, I have offered three basic criteria against which 
Social Security reform proposals may be measured. These may not 
be the same criteria every analyst would suggest, and certainly 
how policymakers weight the various elements may vary. But if 
comprehensive proposals are evaluated as to (1) their financing 
and economic effects, (2) their effects on individuals, and (3) 
their feasibility, we will have a good foundation for devising 
agreeable solutions, perhaps not in every detail, but as an 
overall reform package that will meet the most important of our 
    I believe it is possible to reform Social Security in a way 
that will exceed the expectations of all generations of 
Americans. The reports about Social Security's long-term 
solvency problem and the challenges it represents have caused 
many Americans to have decidedly low expectations about the 
future of their Social Security benefits. Many current retirees 
and those nearing retirement believe that their benefits will 
need to be cut to restore solvency, while some baby boomers and 
many generation Xers are doubtful that the program will be 
there for them when they retire. We believe it is possible to 
craft a solution that will protect Social Security benefits for 
the nation's current retirees, while ensuring that the system 
will be there for future generations. Perhaps the answer is not 
solely one approach or another--such as defined benefit versus 
defined contribution. Bridging the gap between these approaches 
is not beyond our ability. Doing so would represent a major 
accomplishment that would benefit future generations. It would 
also help to restore the public's respect for and confidence in 
its government. GAO and I stand ready to provide the 
information and analysis that can help the Congress meet this 
challenge in a way that can exceed the expectations of all 
generations of Americans.
    Mr. Chairman, this concludes my remarks. I would be happy 
to answer any questions you or other Members of the Committee 
may have.













Financing Sustainable Solvency 

    To what extent does the proposal:
    --restore 75-year actuarial balance?
    --create a stable system beyond the 75-year period?
    --increase national saving?
    --reduce debt held by the public?
    --draw on general revenues to finance changes?
    --use Social Security trust fund surpluses to finance changes?
    --result in a future budget deficit?
    --require an increase in taxes?
    --create contingent liabilities? 

Balancing Adequacy and Equity 

    To what extent does the proposal:
    --provide reasonable minimum benefits to minimize poverty among the 
    --provide adequate support for the disabled, dependents, and 
    --provide higher replacement rates for lower income workers?
    --ensure that those who contribute receive benefits?
    --provide a reasonable return on investment?
    --expand individual choice and control?
    --improve intergenerational equity?
    --provide an opportunity to enhance individual wealth?
    --set reasonable targets as to the percentage of the current and 
projected economy and the federal budget, represented by these costs?
    --provide safety valves to control future program growth? 

Implementing and Administering Reforms 

    To what extent does the proposal:
    --provide a reasonable amount of time and adequate funding for 
    --result in reasonable ongoing administrative costs?
    --allow the general public to readily understand its financing 
structure thereby increasing public confidence?
    --allow the general public to readily understand the benefit 
structure thereby avoiding expectation gaps?
    --limit the potential for politically motivated investment 


    Chairman Shaw. Thank you, Mr. Walker. The questions you 
refer to, I assume, are at the end of your full statement?
    Mr. Walker. Yes, Mr. Chairman, that is correct.
    Chairman Shaw. I would like to focus on two words in your 
testimony and that is the question of ``solvency'' and 
``sustainability.'' In doing so, I would call your attention to 
figure 6 in your written testimony. That is the figure in which 
you show the buildup of the Social Security fund until on or 
about 2013, and then the decline of the Trust Fund until 2030-
something, in which it goes into the red. At what point is the 
solvency of the fund affected? At which point?
    Mr. Walker. Mr. Chairman, there are several key measures 
and dates, I think, that have to be kept in mind. First, from a 
cashflow standpoint, 2013 is the date. Starting in 2013, you 
either have to increase revenues, cut benefits, or increase 
debt held by the public in order to pay benefits.
    Chairman Shaw. So 2013 is the critical date?
    Mr. Walker. The most critical date is 2013. The year 2032 
represents the date by which the Trust Fund's assets--Treasury 
bonds--will be exhausted. So we believe it is important to look 
at 2013, as well as 2032, but to recognize that you need to 
have a reform proposal that not only achieves actuarial balance 
over 75 years, but is sustainable and avoids this cliff effect 
that you see in figure 6.
    Chairman Shaw. Would the net effect be any different with 
or without a trust fund?
    Mr. Walker. The trust fund is an accounting mechanism. 
Unfortunately, that is part of the public confusion. When most 
people talk about a trust fund, you talk about a separate and 
distinct legal entity covered by fiduciary responsibilities--
funded with hard assets--stocks, bonds, government securities 
that back a stated promise. That is not what we are dealing 
with here. What we are dealing with here is a budget account. 
Now, the bonds that are in that account, in fairness, are 
guaranteed both as to principal and interest. They are backed 
by the full faith and credit of the United States government. 
But it is not a trust fund as we would normally think of it, 
and that is part of the public confusion, I think.
    Chairman Shaw. The year 2013, that is the date that we have 
got to move if we don't want to increase taxes or cut benefits. 
That is the date we have to focus on, correct?
    Mr. Walker. We believe that is the key date. It is not that 
2032 is not important. It is. We believe that 2013 is the key 
    Chairman Shaw. Would you elaborate on the word 
    Mr. Walker. ``Sustainable'' means that we deal with the so-
called cliff effect. In 1983 after the Greenspan Commission, 
the Congress enacted legislation that they thought at that 
point in time was going to solve this problem. We came within 
days of not being able to get the checks out on time, back 
then. But part of the problem was that the reforms had this 
cliff effect that Congress evidently didn't predict. You have 
good years followed by progressively bad years. Therefore, when 
you are looking at a rolling 75-year time, simply by moving 1 
year forward, the deficit over 75 years gets worse, because you 
are replacing a good year with a bad year. Sustainability means 
that we need to make sure that not only do we have actuarial 
balance over 75 years, but that we have actuarial balance in 
year 75, such that we are not going to have to be back here in 
15 to 20 years--like we are now--doing the same thing again.
    You, obviously, know how difficult it is to go through this 
process. I would hope that we could learn from the past and try 
to make sure that the reforms that take place now don't have 
this cliff effect, and not only assure solvency, but also, 
    Chairman Shaw. Thank you.
    Mr. Matsui.
    Mr. Matsui. Thank you, Mr. Chairman.
    Mr. Walker, have you had a chance to look at Martin 
Feldstein's plan? Are you familiar enough with it to comment on 
some of the specifics of it?
    Mr. Walker. I am somewhat familiar with it because I knew 
that this was a plan that we could be asked to analyze 
according to our criteria. I met with Dr. Feldstein last week 
for about an hour, when he was in town, in order to try to 
obtain a better understanding of it. So I am somewhat familiar 
with it. But I understand that it is evolving.
    Mr. Matsui. Right. Well, let me just ask you--I want to ask 
you about some of the more, I guess, general concepts of the 
plan. It basically would provide 2 or 3 percent of a tax 
credit, up to $74,000 or $75,000--whatever our cap is at this 
particular time. As a result of that, somebody making $20,000 a 
year would probably end up getting about $400, if in that 2 
percent situation, and somebody making $74,000 ends up getting 
about $1,500-$1,800--somewhere within that range. Would that 
satisfy your criteria in terms of equity?
    Mr. Walker. My understanding is that, under his current 
proposal, he would take about 2.3 percent of taxable payroll 
and he would propose that amount come out of the unified budget 
surplus. It would be allocated to individual accounts. Those 
individual accounts would be invested in hard assets that would 
buildup over time, which, presumably, would create an 
incremental rate of return above and beyond treasury bonds, but 
obviously there is some risk.
    Mr. Matsui. Maybe.
    Mr. Walker. That's right. Historically, based on long-term 
averages, stocks have generated about 7 percent real return, 
for example, as compared to 2 to 3 percent for government 
bonds. Over time he is assuming that there would be a 
incremental rate of return. It is also my understanding, Mr. 
Matsui, that he proposes to guarantee all current benefits, and 
that what would happen is that 75 percent of the buildup in 
these accounts would be given back to the Social Security Trust 
Fund to pay the existing defined benefit promises. Therefore, 
under his proposal, people would never get less money than they 
are going to get today, but they could get more money.
    Now there are clearly a number of positives associated with 
that, but there are a number of concerns associated with that, 
too. I think that is why it is important to answer all these 
questions about this proposal and every proposal.
    Mr. Matsui. Well, would you say that what I just suggested, 
would that fit the equity criteria?
    Mr. Walker. Well, it clearly meets the adequacy.
    Mr. Matsui. I'm sorry?
    Mr. Walker. It clearly meets the adequacy test.
    Mr. Matsui. No, I am asking just about equity.
    Mr. Walker. There are several dimensions of equity. One 
dimension of equity is rates of return. When I think of 
equity--the way that we normally refer to equity, there are 
different ways you can do it--is, what rate of return does the 
individual get on their payroll contributions? There are other 
ways to look at equity. Equity in that definition would be 
enhanced. Adequacy would be maintained. But there are certain 
other things that one would have to say in the interest of full 
and fair disclosure. It presumes that these surpluses will 
    Mr. Matsui. Without getting into your conversation, did he 
ever talk about the maintenance cost of all this? You know, 
somebody who gets $400 a year in this account--$20,000 annual 
income, that person then invests. He has a fund manager and 
whatever the overhead costs to have that fund manager 
administer the fund. Then, obviously, after the 75 percent is 
taken out of that--the tax, 90 percent, or whatever it might 
be--that person has to get an annuity account. I guess there is 
a cost to that. Did he walk you through that?
    Mr. Walker. Dr. Feldstein has not really focused on the 
administrative aspects criteria. In fact, that is one of the 
elements that we include in ours that is important to focus on.
    Mr. Matsui. You know what I think would be a good idea? If 
you could look at the Feldstein plan as he described to you and 
all the paperwork, then maybe test it against your five 
criteria. Then, maybe give us a written response to that. I 
don't know what he told you and what his plan is, because it 
changes all the time, I understand. So, if you could look at 
the plan he offered you, with all the paperwork; then test it 
against your criteria and send us a letter. I really want this. 
It will help us really analyze whether Mr. Feldstein's plan 
meets kind of your test. I think it really would be important. 
Is that something you feel you could do?
    Mr. Walker. He didn't give us any paperwork. It was just an 
interview. I think what we potentially could do is to try to 
answer these questions with factual information. The Congress 
has to draw its own opinions and conclusions about whether or 
not it meets the test. I think our job is to give you facts to 
try to provide you with a framework, so that, hopefully, you 
can make decisions.
    Mr. Matsui. Oh, no, I understand that. I understand that, 
but we need some conclusion. We just can't throw a lot of 
principles up in the air and not come to a conclusion.
    I know my time has expired, but let me just, if I may--
again as Dr. Feldstein developed his plan to you, is that 
sustainable? You know, he is using this surplus. It is huge tax 
consequences. Then the clawback--I call it a confiscatory tax 
on the assets, but most people like to call it a clawback--I 
understand it could be up to 90 percent. That is more than 
    Mr. Walker. If the assumptions prove valid, it would meet 
the test of sustainability.
    Mr. Matsui. When you say ``if,'' I need to know what that 
means. That is really important. Because, otherwise, they may 
say you say it is valid. What are the assumptions we are 
talking about?
    Mr. Walker. For example, are the surpluses going to 
materialize or not? Second, are the incremental rates of return 
going to be achieved?
    Mr. Matsui. All of the surpluses are used for this purpose 
rather than using it for defense spending?
    Mr. Walker. The 2.3 percent. Are the incremental rates of 
return going to be realized? So there are certain key elements 
that you would have to look at. I assume that we are going to 
be back to testify on a variety of proposals.
    Mr. Matsui. I would hope so. I would hope so.
    Mr. Walker. And, frankly, I think that we will practice 
what we preach. We will use our criteria in doing that. I think 
that is important. But his program by design would be 
    Mr. Matsui. If you don't use any of the surplus except for 
the tax credit, and if, in fact, whatever the clawback 
percentage is is adequate--right? I mean it could be 99 
percent. We don't know what it could be.
    Mr. Walker. I think one of the challenges, Congressman, 
that I mentioned to Dr. Feldstein is the so-called clawback. 
How are people going to react to that? If you have an account 
with your name that builds up over 20 years that has an account 
balance of ``x'' in it, and all of a sudden 75 percent or 90 
percent of ``x'' disappears, I think there could be a real 
expectation gap there. Now, there are different ways to achieve 
that same objective, if you wanted to. I think that is a matter 
of concern and that is one the questions that is in this list.
    Mr. Matsui. If I could just add, I just want to make one 
observation. If that clawback is up to 90 percent, or even 85 
percent, 75 percent, it is almost as if this is a way to avoid 
the government investing in the market. Basically, the 
government invests in the market through individuals. Then you 
have, obviously, the overhead costs. Because it is a big tax 
coming back, the government, ultimately, gets the money anyway, 
except it is less efficient than if the government invests 
directly in the market. It is kind of an interesting concept 
that uses individuals basically to invest for the government, 
because the government gets almost all the money back anyway. 
That is for another day, I know.
    Mr. Walker. Well, Dr. Feldstein was fairly clear with me on 
two points. One, he felt that it was important to preserve the 
surplus in a way that would increase real saving. This is one 
way to do it. Second, he felt that it was important to prevent 
political manipulation of the trust fund investments. His 
opinion is that individual accounts would help to prevent that. 
I think that is one of the reasons he constructed it the way 
that he proposed. There are other ways you could do it.
    Mr. Matsui. The business to go into would be fund managers. 
Great opportunities for young people. Thank you.
    Chairman Shaw. Mr. Portman.
    Mr. Portman. Thank you, Mr. Chairman. I want to thank our 
witness for, again, giving us a sober assessment of our 
challenges. You are not approaching this like you approached 
Medicare, Mr. Walker, which you said earlier presents an even 
greater challenge. In fact, your statement that we can exceed 
the expectations of all generations--those who are already in 
their retirement years, those who are near retirement and then 
those of us who are in the baby-boom years and younger 
generations--is accurate. I think that makes this debate a 
little more fun than the Medicare debate, which is probably 
more difficult. I don't object to talking about the Feldstein 
proposal. I know it is not really the subject of the hearing. 
We are focusing on the goals and criteria for assessing 
reforms, but I think it is very interesting to go through it. I 
know it is evolving. I know that the specifics are not out 
there. It is a very interesting idea to take the notion that 
the President laid out back in December of last year, which is, 
if you don't want to raise taxes and you don't want to reduce 
benefits, given the demographic realities that you charted out 
so well, the most promising way to do that is to get a higher 
rate of return for beneficiaries. The question is, how do you 
do that? I think there is a legitimate debate to be had on 
    I think, as the Chairman said earlier, there is a lot of 
skepticism about the government making those decisions. We 
certainly heard from Chairman Greenspan on that. The question 
is whether an individual-directed investment does give this 
ability to exceed expectations and to make this an improvement 
of the current system without sacrificing any of the security 
that is currently invited in our Social Security system. I am 
looking forward to this debate continuing.
    I will get back to your testimony and the focus of the 
hearing for a second. At the beginning of testimony you talk 
about the three-legged stool. I am going to go back to that 
analogy that is used a lot. I like it because I think it is 
realistic. As you know, probably, there was more money paid 
under employer-based private pensions and public pensions--
403(b)s, 457s--last year than under Social Security. It is a 
very important part of retirement security for all Americans. 
As you know, Mr. Cardin and myself and many Members of this 
Subcommittee have a bill that we introduced a couple weeks ago 
on that topic. We had a good hearing the day before yesterday 
where we had testimony from all sides.
    Have you taken a look at that issue? I mention it because 
you do get into the three-legged stool at the outset. Have you 
had a chance to look at the legislative ideas to simplify and 
expand the private side to ensure retirement security?
    Mr. Walker. I need to look at the most recent bill, 
Congressman. As you probably know, I was Assistant Secretary of 
Labor for ERISA for several years--so this is an area that is 
very near and dear to my heart--in addition to being a former 
trustee of Social Security and Medicare. I do think there is a 
need for simplification. I know that some of the things that 
you have been talking about, both yourself and Congressman 
Cardin, would be a step in the right direction. I need to look 
at the bill. I will do that. To the extent that you would like 
any comments on that, I would be happy to talk to you about it.
    Mr. Portman. I would love to. I don't want to overburden 
your folks behind you there, who are focusing on Social 
Security. I would just make the point that the purpose is to 
ensure retirement security. I think Congress, over the last 
decade and a half, has gone the wrong way in terms of the 
private side until very recently. Here is an opportunity this 
year with Social Security reform, which I think has to be the 
bedrock. Because, as you say, about 20 percent of Americans 
rely on it exclusively. Most Americans now are in some kind of 
a pension system. We want to expand that number greatly. It is, 
again, a tremendous opportunity. I would love for you to take a 
look at it. PBGC, the Pension Benefit Guaranty Corp., 
incidentally, testified and they are very positive both on what 
we do on the defined benefit side--of course, where they are 
more involved--but also on the defined contribution side.
    One other question, if I might, quickly: When you look at 
your criteria at the end, which I think are good, on financing, 
balancing adequacy and equity, and some of the implementation 
and administrative aspects, if you could apply that to the 
various proposals, including the President's proposal, I think 
it would be helpful. The President didn't pretend to save the 
system for 75 years. It is not a specific proposal, yet, in 
writing. It does have some ideas in it. I think it doesn't meet 
the criteria that you have laid out, with a couple of 
    Finally, in your testimony before the Senate, you talked a 
little about what you thought might need to happen with regard 
to Social Security reform to have it be effective. You said 
that the greatest array of possibilities and different 
approaches should be looked at. I think it was on page 15 of 
the February 9 testimony before Senate Finance you said that 
different approaches needed to be combined, including 
individual accounts. Do you believe that is part of the answer 
if it can be properly structured?
    Mr. Walker. Well, I don't believe it is appropriate for me 
to take a position on whether or not I think individual 
accounts are part of the solution or not. I think in my 
testimony what I said, Congressman, is that one of the things 
that you need to do is you need to look at a package. There are 
ways to take different elements and combine them in a package 
in a way that will achieve overall objectives. It is possible 
to do that with individual accounts. I don't want to take a 
position on whether or not I am for or against individual 
accounts. I don't think that is appropriate for me to do.
    Mr. Portman. I think that is fair. It is good to have GAO's 
objective analysis out there. We look forward to working with 
    Thank you, Mr. Chairman.
    Chairman Shaw. Mr. Levin.
    Mr. Levin. First of all, Chairman Shaw, I read over the 
resolution that you referred to--the 99-to-nothing vote--and I 
just don't think anybody should be under a misconception that 
there is no support for some system of investment of these 
funds other than individually. As I understand the discussion, 
or the approach, in the Senate it was the use of the word 
``directly'' in front of ``invest contributions'' was thought 
by many Democrats to mean that there would not be a board of 
independent managers. So, no one here should think that the 
vote in the Senate means that there is no support for the 
President's proposal.
    Second, I just want to say to you, Mr. Walker, I think 
neutrality on your part may well be important. It is going to 
be very difficult for you to maintain it. You are delving into 
issues that are complex and also controversial. Also, you may 
have taken positions in the past that aren't neutral on these 
subjects. Weren't you part of a commission that took a position 
on Social Security reform?
    Mr. Walker. Let me address that. Thank you. I have fully 
disclosed that, prior to assuming the responsibilities as 
Comptroller General, I have served in a number of government 
positions and I have been on various commissions. One of the 
commissions that I was on was the Center for Strategic 
International Studies' Commission on National Retirement 
Policy. Senator Breaux, Senator Gregg, Congressman Kolbe, and 
Congressman Stenholm were also on that Commission. That 
Commission did come up with a reform proposal as a package. It 
passed 24 to nothing. I was one of the commissioners that voted 
for it.
    At the same point in time, there are things in it that I do 
not like. There are also things that I would prefer to be 
included that were not in it. And that was prior to assuming my 
current position.
    Mr. Levin. OK, I just wanted to indicate that because of 
the nature of the subject matter and your past--your taking 
positions in the past, it is going to be difficult I think--you 
have a real challenge to give the perception and the reality of 
neutrality. I have not studied before in detail these 
questions, but, for example, I do not see here--maybe I missed 
it--a question about what would be the impact of any plan on 
other governmental expenditures. Now, maybe it is here, and I 
do not see it.
    Mr. Walker. I think indirectly it is, Congressman. For 
example, what is the impact on the deficit--what is the impact 
on the Federal budget? What is the size of the program as a 
percentage of GDP? I think that was our intention of trying to 
get to the point that you are raising, because I think it is an 
important one.
    Mr. Levin. OK, well, I think those are different issues. By 
the way, the Feldstein plan has been in writing, as well as 
your having discussions. I am just curious--look at your first 
questions and just answer objectively. Does the Feldstein plan 
restore 75-year actuarial balance?
    Mr. Walker. If his assumptions prove valid, the answer is 
    Mr. Levin. Does it reduce the debt held by the public?
    Mr. Walker. No. You cannot spend the money twice, in other 
    Mr. Levin. OK. And in terms of requiring an increase in 
taxes, that depends on its assumptions, right?
    Mr. Walker. Right, it would use part of the surplus, which 
is general revenue financing, but----
    Mr. Levin. It does?
    Mr. Walker. Correct.
    Mr. Levin. OK.
    Mr. Walker. Well, it does not require a current increase in 
taxes, no. It uses part of the surplus, which would represent 
general financing, but it does not necessarily require a 
current increase in taxes, no.
    Mr. Levin. One last question: you say one of the key things 
is whether a plan could readily be explained to the public. How 
can you explain to the public convincingly a plan that would 
take three-quarters back of any return? You think you can go 
before the public and explain that persuasively?
    Mr. Walker. I think that it is one of the largest 
challenges associated with this proposal, and I mentioned this 
to Dr. Feldstein; that from a practical standpoint, if you have 
an account that accumulates in your name over a number of 
years, and you have a clawback of a material percentage, I 
think that is a problem.
    Mr. Levin. Seventy-five percent.
    Mr. Walker. That is right. I think it is a real problem.
    Mr. Levin. Or more. OK.
    Mr. Walker. I think there are ways you could get the same 
thing done different ways, if you wanted to, but I think that 
particular approach is a real problem.
    Mr. Levin. Thank you.
    Chairman Shaw. I would like to point out, Sandy, that on 
the bottom of the first page of Mr. Walker's testimony, it says 
that--in talking about the basic criteria--the extent to which 
the proposed proposal achieves sustainable solvency and how the 
proposal would affect the economy and the Federal budget is 
important. I think that is about as inclusive as you can get. 
And I think, also, it is important to point out that, if we 
start thinking that we are to only bring people into the 
Federal Government who do not have any opinions, we are going 
to end up with a lot of stupid people.
    Mr. Levin. Let me just say, I do not suggest that for a 
moment. I do think that everyone should be aware, though, of 
what they bring to the government. And, in your case, I am 
urging your neutrality--you come as having expressed an opinion 
in favor of a particular proposal. And you--I mean, everybody 
knows that. I am just saying that I think it makes your job all 
the more difficult.
    Mr. Walker. One thing I could tell you, Congressman, if I 
had to draft a proposal of my own, it would be a different 
proposal. I think that is one of the things that the Congress 
needs to focus on here, quite candidly, is that reform has to 
be considered as a package. There are tradeoffs in packages. 
There is a statement that I included in the record of the CSIS 
report that I would commend to you to look at. But I have been 
a trustee of Social Security and Medicare. I have been 
Assistant Secretary of Labor for ERISA. I have never ever had 
anybody question my integrity or objectivity. I can assure you 
that you won't need to. Thank you.
    Chairman Shaw. I am absolutely sure of that. You are CPA, 
are you not?
    Mr. Walker. Yes, I am, among other things. I won't say that 
necessarily does it, but I appreciate the thought.
    Chairman Shaw. Mr. Tanner.
    Mr. Tanner. Thank you, Mr. Chairman. I just have one 
    When Chairman Greenspan was here, he said the single best 
thing this government could do now ``to save Social Security'' 
would be to reduce the outstanding debt, nongovernmental debt. 
Do you agree?
    Mr. Walker. We are on record as saying that paying down 
debt held by the public is the most certain way to increase 
future economic capacity and growth.
    Mr. Tanner. Thank you. I yield back.
    Chairman Shaw. Mr. McCrery.
    Mr. McCrery. Mr. Walker, I want to, first of all, point out 
that, at the time that you and Mr. Stenholm and others were 
working on that proposal, we were still expecting deficits at 
the Federal level. Times have changed quite a bit since you all 
developed that proposal, and I think you would say that the 
change in the fiscal condition of the Federal Government 
presents other options perhaps for dealing with Social Security 
than you all had to look at when you were putting together that 
    Mr. Walker. There have been material subsequent events, and 
that is one of them that I think obviously the Commission would 
have considered.
    Mr. McCrery. I want to get back a point made by the 
Chairman. He said that the 2013 date is important because, in 
2013, we would either have to raise taxes or cut benefits. 
Well, that is not exactly correct, is it? If the country is 
running a surplus through 2013, another option would be to 
simply pay down less of the Federal debt, the public debt, in 
order to redeem the bonds in the trust fund?
    Mr. Walker. That is correct from a macroeconomic 
    Mr. McCrery. We could do that without raising taxes or 
without cutting benefits, is not that correct?
    Mr. Walker. From a macroeconomic standpoint, yes. I think 
what the Chairman was referring to was you need to deal with it 
at two levels: macro, which is the unified budget, which is 
what you are referring to; and micro, which is the program 
itself, which is intended to be self-financing and self-
sustaining. It won't be self-financing and self-sustaining 
starting in 2013, at least from a cash perspective.
    Mr. McCrery. Well, yes, it will, because it will have bonds 
in the trust fund, backed by the full faith and credit of the 
United States government, that are redeemable. So, it is self-
financing. The fact that we have to draw cash from the general 
fund to redeem the bonds should not make us say that the trust 
fund is a fiction. It is not a fiction.
    Mr. Walker. Well, I think that is an important point, 
    Mr. McCrery. It is internal debt. It is fully redeemable.
    Chairman Shaw. Would the gentleman yield?
    Mr. McCrery. Surely.
    Chairman Shaw. You are taking something out of context. I 
said, would the result be different with or without the trust 
fund. And, clearly, it would not be because, where is the money 
coming from that is being paid out in benefits? It is coming 
from a combination--right now, it is coming out of the payroll 
taxes, FICA. After 2013, it is going to have to be a 
combination of general revenue from the government and the FICA 
tax; or, in the alternative, increasing the FICA tax. So let me 
be sure the record is very clear on that. And the result is the 
same, whether you have the trust fund or not.
    Mr. McCrery. You are correct on that. But it is not correct 
to say that in 2013 we will either have to raise taxes or cut 
    Mr. Walker. Well, I think I responded to that. But I think 
you are making an important point, which needs to be made, and 
that is there is substance to these obligations. These 
obligations are guaranteed as to principal and interest. They 
are backed by the full faith and credit of the U.S. Government. 
In effect, what we have in Social Security is certain 
obligations. The obligations represent the promises that are 
made for benefits under current law. Some of those obligations 
are backed by payroll tax revenues. Some of those obligations 
are backed by government bonds. And then we have a financing 
gap, which has to be closed.
    I do not want people to think that those bonds are not 
worth anything. They are. But from a macroeconomic standpoint, 
you have got to pay off those bonds. You cannot pay Social 
Security benefits with bonds. You have got to pay them with 
cash. And so, therefore, from a macroeconomic standpoint 
eventually we are going to have to pay the bonds off.
    Mr. McCrery. Absolutely. But if we are running an overall 
surplus at the Federal level at the time we have to redeem 
those bonds in the Social Security Trust Fund, we do not have 
to raise taxes. We can simply redeem less of the publicly held 
debt, and redeem more of the internal debt in the Social 
Security Trust Fund.
    Mr. Walker. And I agreed with that.
    Mr. McCrery. And that points up one, I think, very good 
facet of the President's proposal on Social Security. He does 
propose to use a good portion of the expected surplus to buy 
down the publicly held debt from now through 2013 and beyond. 
And that gives us the flexibility--if we adhere to that, it 
gives us the flexibility when payroll tax revenues are 
insufficient to meet the demands of the Social Security payout 
to simply transfer from redeeming publicly held debt to 
redeeming debt in the trust fund without raising taxes. So I 
think the President's plan is a good one in that respect.
    Mr. Walker. We are on record saying that that is a very 
positive element of the President's plan--paying down debt held 
by the public.
    Mr. McCrery. Now, you note in your testimony, that 
comparing reform options to current law is not an appropriate 
benchmark. What is an appropriate benchmark?
    Mr. Walker. I think you have to look at two different 
elements. You have to look at promised benefits and funded 
benefits. I have seen people out there doing comparisons where 
they will end up comparing a reform proposal to current 
promised benefits, but there is a 2.19 percent payroll tax 
financing gap on promised benefits. We do not have the revenues 
to meet promised benefits. Therefore, you cannot just consider 
promised benefits, you also have to consider funded benefits 
when you are comparing various reform proposals.
    Mr. McCrery. Thank you.
    Chairman Shaw. Mr. Cardin.
    Mr. Cardin. Thank you, Mr. Chairman. I would like to follow 
up on some of Mr. McCrery's questioning, because I do think the 
President's outline or proposal does have the trust fund more 
like a trust fund, to the extent that there are investments of 
funds in equities. That makes them more like a trust fund 
because it is going to be less paying down of public debt to 
the extent that moneys are invested in equities. And second, 
the returns are going to be producing more revenue that 
ultimately will be to the benefit of the United States 
    Mr. Walker. I agree. That element is more like a real trust 
fund. It would result in incremental rates of return above and 
beyond Treasury bonds.
    Mr. Cardin. And I would just like to underscore the point 
that the Chairman made, and I guess you are making also, and 
that is one of the ways to evaluate is to what extent does it 
provide a reasonable return on investment; that Democrats and 
Republicans all agree that what we need to do is get a better 
rate of return in the Social Security system. And I assume the 
reason you list that here is for us to evaluate recommendations 
or plans as to how well it fares on providing a better rate of 
return for the Social Security system?
    Mr. Walker. Right. I think there are two ways: Rate of 
return for the Social Security system, and rate of return for 
the individual beneficiaries who are paying taxes.
    Mr. Cardin. That is true, and the Chairman pointed out the 
99-to-0 vote in the U.S. Senate. And I just want to underscore 
the point that Mr. Levin made and that is there is total 
agreement that we do not want direct investment by government 
officials. That is not the President's proposal. The 
President's proposal is to have those investments made through 
a private entity; through protection in law on the entity that 
selects how investments are made. And you have also indicated 
that as a criteria to review proposals by to what extent does 
the proposal limit the potential for political-motivated 
investment decisions. I assume that is one of the reasons you 
listed that there.
    Mr. Walker. That is correct. We have crossed that bridge 
before in connection with the Federal Thrift Savings plan, 
although clearly one has to recognize that the magnitude of the 
dollars here are a lot higher and the number of people affected 
are a lot greater.
    Mr. Cardin. I assume there is always a risk here--whatever 
plan, even with private accounts, that are set up through a 
Federal structure. There is also a concern that we set it up in 
a way that minimizes that risk.
    Mr. Walker. Absolutely.
    Mr. Cardin. You also indicate as one of the standards to 
what extent does the proposal increase national savings. And I 
just really want to underscore the point that Mr. Portman made. 
It may well be that our legislation is not one that will be 
directly linked to Social Security changes, and we can fully 
appreciate that. But it seems to me that related proposals that 
try to increase a private retirement savings are consistent 
with what we are trying to do on Social Security; that is, to 
provide for a stronger retirement security for Americans; yes, 
by strengthening Social Security, but also by looking at why we 
have not done better as a nation on private savings; why we 
have not done better as a nation for private retirement. And, 
yes, the direct proposal might help us in that regard. But 
there will also, I hope, be efforts made to combine other 
proposals to look at existing mechanisms in place for private 
savings and retirement that can help strengthen this Nation's 
retirement security.
    Mr. Walker. I think that is very important, Congressman. 
When I look at retirement security, I think there are a couple 
of elements: one, to make sure that Americans have an adequate 
stream of income throughout retirement; and second, to make 
sure they have access to affordable health care. To deal with 
that, you have to look at Social Security, private pensions, 
personal savings, Medicare, employer-provided health care, and 
individual health care arrangements, among other things.
    Mr. Cardin. And the last question I have for you--I am very 
impressed by your written and oral presentations here and your 
commitment of objectivity in evaluating proposals. We need 
that. And we need to be able to bridge a way to come forward I 
hope with a bipartisan recommendation for Social Security.
    My concern is that you have said in evaluating at least a 
verbal presentation of a proposal, but Dr. Feldstein, that 
based upon his assumptions or based upon--how do you determine 
how realistic those assumptions are?
    Mr. Walker. We can take a shot at that. And I imagine that 
we might be asked to take a shot at that. One of his 
assumptions is the rate of return with regard to equity 
investments. And there are a lot of other people that are 
talking about rates of return for equity investments like the 
President. The President had to make an assumption as to what 
he was assuming the incremental rate of return would be on his 
proposed equity investment by the trust fund. I can look and 
verify this, but I think both may have used something close to 
a 7-percent real rate of return. I will look to try to verify 
    Mr. Cardin. Let me make just one suggestion to you. It may 
be helpful to us in evaluations as to how risky assumptions 
are. Some proposals have very little at stake on sums that are 
pretty well known. Transferring some of the surplus directly 
into the trust fund is a known quantity. There are no 
assumptions there. Whereas, other proposals have much more 
risky outcomes because assumptions are not as certain. And I 
think it would be useful for this Subcommittee if you could 
help us in saying how safe or how much risk there is involved 
in the assumptions that are used in order to achieve our 
    In 1983, we missed. We did not get where we thought we 
would get. And I hope in 1999 we are more accurate in reaching 
what we need to do in Social Security.
    Mr. Walker. I think there are two ways we can help on that: 
One is the structure of the proposed reform. What are the 
risks, for example, that the government will assume from 
contingent liabilities? And then, second, what are the risks 
associated with the underlying assumptions that relate to 
reform? And I think it is very relevant for us to help the 
Congress look at those.
    Mr. Cardin. Thank you.
    Chairman Shaw. Thank you. Mr. Matsui.
    Mr. Matsui. Thank you, Mr. Chairman.
    Mr. Walker, I just wanted to ask one more question. It was 
prompted, actually, by Mr. Cardin's question. Do you know how 
much revenue loss is attendant to the Feldstein plan, using the 
2.3-2.2 percent, whatever it is--tax credit of income up to 
about $74,500 over the next 15 years, should it come into play?
    Mr. Walker. I do not, but I can provide it for the record.
    [The following was subsequently received:]

    In response to the questions about Martin Feldstein's 
Social Security reform proposal, Rep. Matsui has asked that GAO 
instead examine the proposal put forth by Chairmen Archer and 
Shaw because the latter proposal is under discussion in the 
House. GAO is preparing a report in response to Rep. Matsui's 
new question that will be available late in the year.

    Mr. Matsui. OK, the reason I ask that is because you are 
saying you are basing your conclusions on a number of 
assumptions. So I would have to assume that you know what the 
revenue loss will be over 15 years or 5 years or 10 years. I 
was under the impression it was somewhere in the range of $4.8 
trillion, but maybe that number is out of sight. I thought it 
was, like, for the first 10 years about $1.8 trillion, and then 
for some reason it just really bounces up. But I am surprised 
you do not know that number. You will have to forgive me by 
making that observation, because you have basically said this 
is sustainable based upon the assumption----
    Mr. Walker. The overall assumptions, that is correct.
    Mr. Matsui. A number of assumptions. But then, if you have 
not really costed it out, I do not know how you can even reach 
that conclusion. I am somewhat perplexed by that.
    Mr. Walker. Well, our people----
    Mr. Matsui. I would expect that we have a little more 
concreteness in the analysis, particularly, the Comptroller 
General. I mean, it seems to me that you cannot reach a 
conclusion and not know that basic number about how much 
revenue loss there will be.
    Mr. Walker. As you can imagine, Congressman, there are 
about 3,200 people who work at the GAO, and we have had a lot 
of people do a lot of analysis of this. I would be happy to 
provide that number for the record.
    Mr. Matsui. Well, well, no. Let me say this----
    Mr. Walker. I just do not recall it off the top of my head.
    Mr. Matsui [continuing]. Your response is very legitimate.
    Mr. Walker. Surely.
    Mr. Matsui. On the other hand----
    Mr. Walker. Yes.
    Mr. Matsui. You were appearing before a congressional 
Committee to address what you, yourself, admit was probably the 
most important policy issue we are going to be deciding over 
the next--maybe our entire careers. And here you kind of just 
threw out, that based upon these assumptions, it is 
sustainable. And I am just really kind of perplexed by that. I 
would just expect a little bit more out of a professional as 
you are in that kind of a situation.
    Mr. Walker. Yes.
    Mr. Matsui. Well, let me finish.
    Chairman Shaw. If the gentleman would yield, though. I 
think what you are saying is very, very unfair.
    Mr. Matsui. It is not unfair.
    Chairman Shaw. That is about as professional an opinion I 
could possibly hear, and, also, it is coming from about the 
most neutral corner you can possibly find to say, assuming 
these things are true, then it is sustainable.
    Mr. Matsui. Yes, but, you do not which----
    Chairman Shaw. It is not being an advocate. It is not being 
an advocate for----
    Mr. Matsui. If I can take back my time--we do not know 
exactly--you do not even know what these assumptions are. That 
is what my problem is. I thought you did know that number.
    Mr. Walker. No, no, Congressman, in fairness----
    Mr. Matsui. That is a followup suggestion.
    Mr. Walker [continuing]. In fairness, Congressman, we know 
a lot more than you are giving us credit for.
    Mr. Matsui. Well, what is that number?
    Mr. Walker. I do not recall off the top of my head, but 
then, again, do you recall what the number is for the amount of 
Social Security obligations right now?
    Mr. Matsui. Well, no, but I am not making a conclusion.
    Mr. Walker. The fact of the matter is that the Social 
Security actuaries and the CBO calculate the exact numbers. Our 
staff is closely coordinating with them. The fact of the matter 
is the President's proposals have assumptions in them, too. And 
that is one of the things that we all have to recognize here is 
a lot of these proposals are based upon assumptions. And I 
think it is very relevant, Congressman----
    Mr. Matsui. Mr. Walker----
    Mr. Walker. Can I finish, Congressman, for a second?
    Mr. Matsui. Well, let me----
    Mr. Walker. I think it is very relevant, Congressman, for 
us to look at the validity of those assumptions and to help you 
understand the risks, and we will do that.
    Mr. Matsui. And let me say this, Mr. Walker: I appreciate 
what you just said. On the other hand, I have to say that you 
gave the impression that based upon these assumptions, this is 
sustainable. But you did not know what these assumptions were. 
And I just do not know how you can come before this 
Subcommittee, and actually reach that conclusion. Now, if you 
would have just basically said, look, we are doing a study on 
this, and we do not know exactly whether it is sustainable or 
not, that is a very, very legitimate answer. And then I could 
not trust it any further. But you basically concluded that this 
was a sustainable proposal based upon assumptions. And all you 
raised was that economic growth would continue where you will 
continue to have a surplus. But it seems to me it is pretty 
obvious that you should know what the revenue loss would be----
    Mr. Walker. With all due respect, Congressman, what I did 
not know was the exact number of 2.3 percent times the 
projected taxable wage base of younger workers for the next 15 
years. That is what I said I did not know. I know what the 
assumptions are for the President's projected budget surplus. I 
have seen what the numbers are for the CBO. I just did not know 
what 2.3 percent times of that wage base was.
    Mr. Matsui. I think, as Mr. Levin said, because you have 
some preconceived notions coming before this Subcommittee, it 
would just make us feel a little bit more comfortable if there 
was just a little bit more caution in your observation.
    Chairman Shaw. I would like to make this final observation, 
if I could. To begin with, this is not a hearing on the 
Feldstein proposal. And I think if you think that the 
Republicans are going to be introducing a plan that is going to 
be a carbon copy of the Feldstein proposal, I think that, based 
upon your comments, that you will be delighted with what we 
might introduce. I also say that this witness has simply said 
that his only exposure to the Feldstein plan is an hour spent 
with Mr. Feldstein, and he is neither an advocate of the 
Feldstein plan, nor is he an expert on the Feldstein plan. And 
I think that this line of questioning has been tremendously 
unfair and below the dignity of this Subcommittee.
    Mr. Walker, thank you very, very much.
    Mr. Walker. Thank you. I appreciate it.
    Chairman Shaw. I appreciate your being with us again today.
    Now, I would like to introduce the next witness from the 
Social Security Administration, Mr. Stephen C. Goss, Deputy 
Chief Actuary for Long-Range Actuarial Estimates.
    Mr. Goss, as other witnesses, we have your full text of 
your testimony, and we will submit that for the record. And you 
may proceed and summarize as you see fit.


    Mr. Goss. Mr. Chairman, Members of the Subcommittee, thank 
you very much for the invitation to come here and speak to you 
today about the work we do at the Office of the Chief Actuary 
at the Social Security Administration in assessing the 
financing and the financial status of the Social Security 
system into the future.
    There are two primary functions that we serve at the Social 
Security Administration in the Office of the Chief Actuary. And 
the first one of those is related to the statutory legal 
requirement of the board of trustees to report annually to the 
Congress on the status of the Social Security system. Two 
different financial estimates are required in that law. One is 
an assessment of the financial status of the system over the 
next five fiscal years; and the other is referred to as a 
statement of the actuarial status of the program, and it is not 
further defined in law. Over time, though, the actuarial status 
of the program has evolved into meaning an assessment of the 
financing of the system over a 75-year period.
    The other primary function that we fulfill at the Office of 
the Chief Actuary at the Social Security Administration is to 
provide estimates and analysis of potential legislative 
proposals that are developed by Members of Congress and by the 
administration. To the best of our ability, we provide 
objective and thorough analysis on these proposals that will be 
useful to policymakers, who are the ones that will ultimately 
make the decisions, as you do, in terms of where we will be 
going in the future with this program.
    I will turn, momentarily, to the current financial status 
of the program. As you all are well familiar, the program 
provides monthly benefits currently to over 44 million 
Americans and the primary financing for this, for these 
benefits, is based on payroll taxes from about 150,000,000 
working Americans. Currently, we are operating with annual 
surpluses to Social Security. The total tax revenue is 
exceeding the cost of the program, and as a result our trust 
funds are growing in magnitude.
    There are three principal dates that are often referred to 
in terms of the financing of Social Security. The first one 
that was discussed at some length with the prior witness, David 
Walker, is 2013; the year in which the tax revenue to the 
system will first be insufficient to be able to pay for the 
cost of the system. Therefore, there will be a necessity to be 
withdrawing some money from the trust funds.
    A second date that is sometimes referred is the year 2021, 
which under the intermediate assumptions of the 1998 Trustees' 
Report, would be the first year in which the combination of 
taxes and interest on the existing trust funds would be 
insufficient to pay for the cost of the program.
    The third date, and I would suggest from the point of view 
of the work that we do related to the financing and the 
solvency of the Social Security system, is perhaps the most 
important date of these three, is the year 2032, the date in 
which the combination of taxes and money available from the 
trust funds will be insufficient to pay the benefits to the 
system. This is one of the very few points that I can think of 
where I would disagree on a technical point with David Walker.
    As of the year 2032, when the trust funds will be exhausted 
and will no longer be available to be able to augment the tax 
income to the Social Security system to allow us to pay 
benefits in full, on a timely basis, there will be continuing 
tax revenue coming into the system under our current 
intermediate projects that would be equivalent to about 71 
percent of the cost of the system. This is, I think, a useful 
measure in giving some sense of how far it is we have to go to 
put the system back into proper financial balance.
    What are criteria for evaluating options for reform of the 
Social Security system? You are all familiar with the very 
great complexity of this system. The fact is that it has been 
over six decades in evolution. It reflects the collective 
judgment of policymakers like yourselves and of several prior 
generations in evolving a very complex and important system for 
providing income to people when they have a loss of income 
because of retirement, disability, or death of a worker in the 
    There are two primary considerations for evolving a plan 
for Social Security. One is the relationship between equity and 
adequacy that David Walker spoke to and also addressed in 
describing the benefit structure.
    The other is the nature really the nature of the financing 
and the financial status of the Social Security Trust Funds 
under the particular plan. The work that we do in the Office of 
the Chief Actuary relates very largely to the latter of these, 
to assessing the financial status of the trust funds under the 
    As you are familiar, we are at this point in time in pretty 
good shape for Social Security financing--to 2013 by 
everybody's assessment, and out to even 2032 from the point of 
view of the solvency of the trust funds under our intermediate 
    For that reason, I will focus in the remaining moments here 
on some concepts of the long-range financial status of the 
program and some of the measures that we think of when we try 
to evaluate these concepts.
    The fundamental criterion for the solvency of the Social 
Security system has to be the ability to pay benefits in full 
on a timely basis. When we reach the point of trust fund 
exhaustion, that means we will not be able, under current law, 
to pay benefits fully on a timely basis. The taxes will be 
insufficient, and the trust fund will be exhausted.
    The most commonly cited single value or measure of the 
status of the trust fund is the term referred to as the 
actuarial balance, which is a representation of the summarized 
present value of the system's income relative to the summarized 
present value of the system's outlays over the next 75-year 
period. Currently, the number that we are all familiar with is 
that this actuarial balance is a negative 2.19 percent of 
payroll. As a negative, we sometimes refer to it as actuarial 
deficit. One possible way of interpreting this 2.19 percent 
deficit is that if we were, starting today, to raise the 
payroll tax rate from its current level of 12.4 percent up to 
about 14.6 percent, raise it by 2.2 percent of the payroll, 
that would be sufficient to put the system in balance and make 
benefits payable over the next 75 years. And I would hasten to 
add that this 2.2 is really only intended to be a marker and 
not any indication by any of our forefathers that this should 
be the way that should be pursued for putting Social Security 
back into balance. Any combination of benefit changes or 
revenue changes that will, in total, result in the same amount 
of money equivalent to a 2.2-percent increase in the payroll 
tax that will be sufficient to put the system in balance.
    There is one additional measure. There are actually many 
others that we could talk about. But there is one additional 
measure that I would like to mention--that was discussed 
somewhat with the prior witness--and that goes beyond the 
actuarial balance for the current 75-year period. With this 
measure we look at the extent that there is stability in the 
actuarial balance in the future. We measure the extent to which 
stability will occur by looking at something referred to as the 
``trust fund ratio,'' which is simply the ratio of the amount 
of money we have in the trust funds at a given moment in time 
as compared to what annual benefits are. At this point in time, 
we are approaching a point where we have about 2 years of 
benefits held in our trust funds. What is critical is that this 
ratio, the percentage of benefits held in the trust funds is 
fairly constant toward the end of the period. If this is the 
case, then we will be in a position where our actuarial 
balances will not be moving toward negative. They will be 
fairly stable in the future. So a very, very reasonable way to 
look for stability in the trust fund financing is whether or 
not these trust funds, as a percentage of annual outgo, are 
fairly stable at the end of the period. This, by the way, does 
not require that the tax income is equal to the outgo at that 
time. If, indeed, there are funds on hand that are generating 
interest sufficient to not only maintain the level of the trust 
funds, but also help pay for some of the benefits at that time, 
then it is possible to have the tax income fall somewhat short 
of the cost of the program.
    This concludes the remarks that I would like to pass on to 
you at this point and would very much enjoy hearing any 
questions you might have.
    [The prepared statement follows:]

Statement of Stephen C. Goss, Deputy Chief Actuary, Office of the 
Actuary, Social Security Administration

    Mr. Chairman and members of the Subcommittee, thank you the 
opportunity to describe the work of the Office of the Chief 
Actuary in assessing the financial status of the Social 
Security program.
    The Social Security Act requires that the Board of Trustees 
report annually to the Congress providing the expected 
operations and status of the Old-Age and Survivors Insurance 
(OASI) and Disability Insurance (DI) Trust Funds for the next 5 
fiscal years and ``a statement of the actuarial status of the 
Trust Funds.'' The Office of the Chief Actuary works with the 
trustees in the development of this annual report of the 
financial status, under present law, of the program.
    In addition, the Office of the Chief Actuary provides to 
the Administration and to the Congress estimates of the 
financial effects on the Social Security (OASDI) program of 
potential or proposed legislation. The mission of the Office of 
the Chief Actuary is to provide objective analysis that will 
permit policymakers to make informed decisions about the future 
of the Social Security program.

        Current Financial Status of The Social Security Program

    The Social Security program currently provides monthly 
benefits to about 44 million individuals. The primary source of 
financing is a payroll tax on the nearly 150 million workers in 
covered employment. Tax revenue currently exceeds the cost of 
the program, so the trust funds are growing. Trust funds are 
currently almost twice the size of the annual cost of the 
program, and growing.
    Based on the intermediate assumptions of the 1998 Trustees 
Report, tax income to the OASDI program is expected to exceed 
cost until 2013. The combined OASI and DI trust funds are 
expected to continue growing until 2021. The combined trust 
funds are then expected to decline until they are exhausted in 
    At the point of trust fund exhaustion in 2032, continuing 
tax income is expected to be equal to 72 percent of the cost of 
the program.

      Criteria for Evaluating Options for Social Security Reform 

    The Social Security program is a complex system developed 
over more than 6 decades to provide monthly benefits that offer 
what has been referred to as a ``floor of protection'' against 
loss of income due to retirement, death, or disability. The 
program provides a blend between individual equity and social 
adequacy that has evolved through the judgement of several 
generations of policymakers.
    Both Annual Trustees Reports and estimates by the Office of 
the Chief Actuary for legislative proposals focus primarily on 
the financial status of the OASDI program. Because current 
program financing is expected to be adequate for the full 
payment of benefits on a timely basis for over 30 years, I will 
describe the criteria used for evaluating the ``actuarial 
status'' of Social Security over the long run.
    The actuarial status of the OASDI program is evaluated over 
a 75-year, long-range projection period. This period provides a 
view of the adequacy of financing over the entire lifetime of 
virtually all current participants in the program, from the 
oldest beneficiaries to the youngest workers. This period also 
provides the opportunity to view the full, mature financial 
effects of legislative proposals that may take decades to 
become fully implemented.
    The most fundamental criterion for evaluating the financial 
status of the OASDI program is its ability to pay full benefits 
in a timely manner. The inability to do so is indicated by 
expected exhaustion of the trust funds within the 75-year 
    Perhaps the most commonly used measure of long-range 
solvency of the OASDI program is the actuarial balance. This 
measure indicates the size of the difference between expected 
financing and cost for the program over the 75-year period, on 
a summarized present-value basis. An actuarial balance of zero 
indicates that financing over the 75-year period is equal to 
the expected cost of the program, with enough left over for a 
trust fund balance at the end of the period equal to the annual 
cost of the program.
    The actuarial balance is expressed as a percentage of 
taxable payroll over the 75-year period. Under the intermediate 
assumptions of the 1998 Trustees report, the estimated 
actuarial balance is -2.19 percent of taxable payroll. Because 
this balance is negative, it is referred to as an actuarial 
deficit. This actuarial deficit indicates that long-range 
Social Security solvency could be restored by an immediate 
increase in the combined payroll tax rate of about 2.2 
percentage points, from 12.4 to 14.6 percent of taxable 
earnings, or by any other combination of revenue increases and 
benefit reductions with the same long-range financial effect.
    An additional important measure for evaluating the 
actuarial status of Social Security is the stability of the 
financing at the end of the 75-year period. Financial stability 
is achieved at the end of the period if total program income is 
sufficient to meet the costs of the program and to maintain 
stable trust fund reserves. Stability of trust fund reserves 
means that the trust fund balance expressed as a percentage of 
the annual cost of the program (the ``trust fund ratio'') is 
essentially constant.
    The Office of the Chief Actuary will continue to work with 
the Administration and the Congress, as policymakers develop 
and consider various options for addressing the long-range 
financing issues facing the Social Security program.
    I will be happy to answer any questions.


    Chairman Shaw. Thank you, Mr. Goss.
    We have two votes that are on the floor. It is the 
intention of the Chair to continue this hearing through the 
lunch hour as not to unduly inconvenience any of our 
witnesses--either you, Mr. Goss, or the panel that is going to 
come after you. We will stand in recess just long enough to 
conclude our voting, and then we shall return.
    Chairman Shaw. Mr. Goss, the President, in his 
recommendation on Social Security, took 62 percent of the 
surplus and ran it back through the Social Security Trust Fund, 
then I believe he took 20 percent of that and invested it in 
equities; and then the funds that came out the other end that 
were not invested in equities, which is 80 percent of the 62 
percent, he then used to retire publicly owned debt--I say 
publicly owned--to mean debt owned by other than the Federal 
Government or the trust fund. Now, let me ask you this 
question: What did that do from an actuarial standpoint to the 
life of the trust fund?
    Mr. Goss. From an actuarial standpoint, the money that 
would be specified to be transferred to the trust funds. Our 
understanding of the way in which that transfer would occur is 
that it would be specified as a percentage of taxable payroll 
in the law so that the money would absolutely be transferred to 
the trust funds. And as you say, 20 percent, actually 21 
percent, of it--of the transfer each year would be invested in 
equities up to a maximum of about 15 percent of the total trust 
fund assets being held in equities.
    From the point of the view of the trust fund, the 
additional money that would be transferred to the Social 
Security Trust Fund----
    Chairman Shaw. This includes the Treasury bills?
    Mr. Goss. Pardon?
    Chairman Shaw. That includes the Treasury bills?
    Mr. Goss. Including the Treasury notes, absolutely. The 
additional money transferred to the trust fund, which I think 
has been widely described as totaling about $2.8 trillion 
dollars over the 15-year period, would be added into the trust 
funds in our calculation and would augment the trust funds both 
in the bonds and in the stock reserves, and those amounts of 
money would be presumed to be available when needed for 
benefits in the future.
    Chairman Shaw. In the form of Treasury bills?
    Mr. Goss. About 85 percent of the trust fund, once we got 
out to the year 2015, would be in the form of the special issue 
Treasury bonds, and the other 15 percent would be presumed to 
be held in equities.
    Chairman Shaw. So that extended the life of the trust fund 
to what--2045?
    Mr. Goss. In total with the purchase and holding of stock 
included, our estimate is that the trust fund exhaustion date 
would be extended to the year 2055.
    Chairman Shaw. Now, that money, if you go back and look at 
the way the unified budget is structured, it could certainly be 
argued that that money has already been through the trust fund 
once. What if you were to take that money that came out of the 
other side and ran it through again? And then my next question 
is going to be, and then again? And then again? And then again? 
Would you push that 2045 and keep pushing that even though you 
are using the same money because you are putting more and more 
Treasury bills in the Social Security Trust Fund, is that not 
    Mr. Goss. Our view is that a crediting to the trust fund of 
money for which bonds are purchased does, indeed, represent a 
commitment of the Federal Government to provide revenue to the 
trust funds at a future point when they are needed. And so I 
would agree with you that by making a transfer that would 
purchase these bonds we would, indeed, be creating a commitment 
to provide the revenue in the future, and we would look at that 
as having improved the actuarial status of the trust funds. The 
one further point that I guess I would say----
    Chairman Shaw. So, if it was a good idea to run it through 
once, it is a good idea to run it through 3 or 4 times, 5 
times, 10 times, 20 times. I mean, you can keep running this 
money through and inflate the trust fund, and then at the end 
you will still have the money left to retire some of the debt. 
And you have created a fiction, and that fiction is that the 
trust fund is out there with assets ready to take care of 
people when they retire without being a future call on the 
taxpayers or requiring any further revenue.
    Mr. Goss. If I may just add, Mr. Chairman, as I think you 
all know, our view on the President's proposals, or proposals 
that are developed by Members of Congress, is not to judge any 
of them as to whether or not----
    Chairman Shaw. No, no. I am not asking you to judge it. I 
am asking you strictly from an actuarial standpoint--just 
strictly from the question--I mean, the more Treasury bills you 
put in the trust fund, the greater--the further that line is 
going to be drawn out as to when the trust fund is going to run 
out of Treasury bills, because Treasury bills is all that is in 
there disregarding the fact that the President's plan puts a 
few stocks in there.
    Mr. Goss. It is true in the assessment that we make that to 
the extent that there are more Treasury bills available to the 
fund that that will, indeed, advance the exhaustion date. The 
only remark that I would suggest, and I am, by no means, here 
as an apologist for the administration or any other entity----
    Chairman Shaw. No, I am not getting into that. I 
understand, and the Social Security Administration--your office 
has been very helpful to this Subcommittee, and I am in no way 
suggesting that your answers would be in any way skewed. So do 
not worry about that.
    Mr. Goss. If I could, Mr. Chairman, just reiterate the 
point that you made earlier about the President's plan, keeping 
in mind that we are not terribly familiar with the budget 
aspects of this, more with the actuarial aspects, but it is my 
understanding, as you stated, that the rationale for having the 
transfers occur is to have publicly held debt reduced by some 
amount along the lines of the amount of the transfers to Social 
Security. However, if, as you suggest, this were done a second 
or a third time, there would not be any further reduction in 
publicly held debt.
    Chairman Shaw. Wait a minute now. Let us back up, because I 
missed a bit there. Let us just get away from the President's 
plan, even though there is going to be great similarity in what 
I am talking about. We run 62 percent of the surplus through 
the trust fund. Period. We do not buy equities or anything 
else. We have extended the life of the trust fund, actuarially.
    Mr. Goss. Absolutely.
    Chairman Shaw. And when it comes out the other end if we 
run it through again, we are going to do that again, and again, 
and again, and again. So you can, in effect, use those same 
dollars, and if you run it through enough times, you can run 
the life of the trust fund out to 2000 whatever you want. 2075. 
2100. I mean, if you redundantly push that money through and 
keep writing more and more Treasury bills, obviously you are 
putting more paper into the trust fund, and you are extending 
the life of the trust fund. But you really have not changed the 
year in which we are going to have to seek additional revenue 
to take care of the claims, is not that correct?
    Mr. Goss. That is true, Mr. Chairman.
    Chairman Shaw. So in my example, you have not changed that 
year 2013? That 2013 is still out there, and it is still a date 
of reckoning on which the Congress is going to have to make a 
tough decision, either raise FICA, hopefully there would be 
surplus that they could use, or raise taxes. I mean, some way 
there has got to be some dollars brought into the government--
additional dollars made available that do not come out of the 
trust fund that would be paid to beneficiaries under the Social 
Security Act.
    Mr. Goss. That is absolutely true. The distinction that I 
think is reasonable to make in this case, though, as to where 
the trust fund does have these bonds as opposed to having no 
trust fund--having the trust fund being exhausted--is that 
there would be a commitment of--indicating what the source of 
revenue would be that would be providing the benefits in that 
period. If there were no trust fund or the trust fund were 
exhausted, then we would be left up in the air as to whether we 
    Chairman Shaw. What is wrong with the trust fund that 
concerns me most. I mean, if a lawyer takes his trust fund and 
goes and pays his mortgage or buys himself a speedboat or 
something of that nature, and puts an IOU in the trust fund, 
and then the examiners come along, and he says, well, geez, 
there is plenty in there. See those IOUs? But the day of 
reckoning is coming, and that is the problem that we have. And 
that is the problem we are wrestling with. And that is the 
problem we are stuck with, where we have to find real cash in 
order to take care of the retirees of the future.
    One of the things in Mr. Walker's presentation that I 
thought was particularly scary was where he was showing the 
number of workers that were there to support each retiree. And 
it is getting down close to two workers per retiree, which is 
totally unacceptable and unaffordable, particularly for low-
income people. And that is--that is what I am so concerned 
about. And that is what I think we really need to concentrate 
on. Mr. Cardin?
    Mr. Cardin. Thank you, Mr. Chairman.
    Mr. Goss, first, let me thank you for your help to those 
Members of Congress who have been asking for information on how 
to deal with the Social Security system. You have been very 
helpful, very objective, and I think that is extremely 
important that we have that type of resource available to us. 
The Chairman's comments about what impact would it be if we put 
more special notes or more government notes into the Social 
Security system--I think we gave a very accurate reply. But, as 
you pointed out, there is also the budget of the Nation. And if 
you try to run more of the special notes into the Social 
Security system, you will be running afoul of our budget 
system. The President's proposal takes 62 percent of a surplus 
that would otherwise be available for government spending; 
could be available for tax cuts; could be available for any 
host of reasons, but the President's proposal, as I understand 
it, pays down the publicly held debt, and gives the Social 
Security Trust Fund additional assets that you correctly 
analyze under an actuary system of extending the life of the 
Social Security--ability to pay its benefits, current 
    The second point I would like to make is that the 
President's proposal also has a better return for the Social 
Security Trust Fund. And that is real dollars in the extent 
that that would extend the 2013 date; that there would be 
additional funds available as a result of a better rate of 
return to the system. I am correct on that, as I see you 
nodding. I am curious that if we all did what we said we would 
like to do, and that is make this a real trust fund, a real 
trust fund with real assets that invests like fiduciaries would 
invest. And if we transfer this 62 percent into the Social 
Security Trust Fund, as the President has suggested; and we 
then allow the trustees to do what any other trustee of any 
other pension plan could do and invest, as the trustees believe 
is best; and the trust invested about 60 percent to 65 percent 
of its assets in equities, which is what is happening in the 
real world out there. And the remainders were invested in some 
types of fixed-rate returns, but better than what they are 
doing on government bonds, which is the lowest rate of return. 
I am curious as to how you would evaluate that in regards to 
the 75-year solvency. It seems to me that we would be much 
further along, and following much more the practice of the 
private sector which many Members of Congress have been urging 
that we do. So I just appreciate your assessment as to what 
impact that would have on the--our goals of achieving a 75-year 
    Mr. Goss. Thank you very much, Representative Cardin. In 
the analysis that we have done in the past, for instance, for 
the Advisory Council, where they had a plan that would, in 
fact, have 40 percent of the trust funds invested in stock, we 
utilized an assumption that was developed within discussions 
with the Advisory Council members, presuming that stocks would 
have a seven percent real yield, which is about the average of 
what stocks have realized so far this century. Using that in 
conjunction with the assumed yield on the government bonds for 
the other 60 percent, I believe that the roughly 2.2 percent 
long-range deficit for the system was reduced by about 0.9 
percent of payroll. It was reduced by not quite half. If, as 
you suggest, we were to go to 60 or 70 percent in stocks, 
presuming that we would be able to achieve the same yield over 
and above the price of bonds, and in addition, put the other 30 
to 40 percent in corporate bonds, which we believe according to 
the Ibbotson data is indicated to be about one-half a 
percentage point higher yield than the government bonds, you 
would probably eliminate something on the order of two-thirds 
of the long-range deficit of Social Security.
    Mr. Cardin. And then, if you transfer the 62 percent of the 
surplus into the trust fund, you get another seven or 8 years, 
do you not? And then, of course, you have more assets to invest 
so that has another impact. It seems to me that you are going 
to be very close if not exceed the 75-year solvency if you were 
to combine the President's transfer of the surplus into the 
fund, and then invest like any other pension fund--whether it 
is a State of Maryland pension fund, or State of California 
pension fund, or a private company pension fund--if you were to 
invest in a similar manner, you could deal with the problems.
    I just mentioned that because--I am not making that as a 
suggestion; I am not making that as a proposal, because, 
obviously, the Social Security Trust Fund is very delicate, and 
we need to deal with it in a special way. But there are many 
here who are saying, why do not we just make this like a trust 
fund? And it seems to me that if we did, we would solve a large 
part of the problem that is out there; if we just allowed the 
trustees to do what any other trustee of a pension plan could 
do, a large part of the problem would be solved in real 
dollars, as the Chairman likes to mention. This would be real 
money coming in, because of a better rate of return.
    I thank the Chairman.
    Chairman Shaw. Oh, Mr. Collins.
    Mr. Collins. Mr. Goss, do you have deductions from your 
income that go into Social Security?
    Mr. Goss. I am sorry, Representative?
    Mr. Collins. Do you have deductions from your income that 
are paid into Social Security? Are you a member of the Social 
Security system?
    Mr. Goss. As a Federal employee, for better or for worse of 
fairly longstanding, I am still, at this point, under the Civil 
Service Retirement System, so my earnings at SSA are not under 
the current Social Security system.
    Mr. Collins. You do not have. You do not participate in the 
Social Security system?
    Mr. Goss. That is correct.
    Mr. Collins. You opted not to. Are you part of the program 
that did not have to go into it?
    Mr. Goss. That is correct.
    Mr. Collins. So you have a different type of retirement 
system? You are a part of a retirement system?
    Mr. Goss. I am--as a Federal employee hired before 1983, I 
participate in the CSRS.
    Mr. Collins. You belong to the Federal Employees Retirement 
    Mr. Goss. I participate in CSRS.
    Mr. Collins. OK, that is all I have.
    Chairman Shaw. Thank you, sir. We appreciate your being 
with us, and we will be looking forward to working with you as 
this whole thing begins to evolve.
    Our next panel is Dallas Salisbury, the president and chief 
executive officer, Employee Benefit Research Institute; a 
former staffer of this Subcommittee, Dr. William Primus, who is 
Director for Income Security, Center for Budget and Policy 
Priorities; and Louis Enoff, Enoff Associates, Limited, from 
Maryland. He is a former Acting Commissioner of the Social 
Security Administration.
    We welcome you, gentlemen. Again, your whole testimony is 
made a part of the record. And you may proceed and summarize as 
you see fit.


    Mr. Salisbury. Thank you, Mr. Chairman and Members of the 
    I appreciate this opportunity to discuss Social Security's 
goals and criteria for assessing reforms. Social Security, as 
has been underlined by other witnesses, plays a critical role 
in providing income to the retired population, the disabled and 
survivors. The primary goals of Social Security have been 
reviewed by previous witnesses. I would stress one among them: 
a benefit that grows in real value by passing on productivity 
increases and lifestyle increases to retirees, with a benefit 
formula that targeted replacement of final income as opposed to 
a constant level of purchasing power. I stress this because of 
the point raised by Mr. Goss that with a ``benefit reduction to 
about 72 percent, current payroll taxes would, in fact, cover 
all benefits.'' In my testimony's chart one, I showed what the 
benefits would be that would be covered by that, and simply 
note with interest that it would provide a continuous increase 
in purchasing power relative to today's retirees. So it gets 
back to the issue of what is a cut.
    In addition, we have talked today about the criteria for 
reform--whether or not a reform supports the basic goals of the 
system of providing retirement income; of the redistributive 
nature of the program; and of long-term financial stability. 
Whether the reform fully utilizes the present administrative 
and recordkeeping structure which has relative cost 
efficiencies; determining whether the reform proposal changes 
outcomes in terms of tax levels, benefits, income levels, and 
life income streams; whether the reform proposal reduces risk 
in the system or increases risk, which goes to the points of 
Mr. Cardin, that in most private pension funds there have been 
very wide variations or return, and as the Pension Benefit 
Guaranty Corporation painfully knows, there have been some 
pension funds that have gone out of business because their 
return assumptions were never met; determining whether the 
reform proposal strengthens, weakens or has no effect on the 
existing system; and whether the affected public would support 
the fundamental reform.
    We have developed a comprehensive model to attempt to look 
at some of these issues. That model allows us to look, for 
example, at issues of equity market investment against various 
assumptions and on a more dynamic income basis than so-called 
static assumptions that are traditionally used by actuaries.
    One of the assessments we tried to look at was an issue of 
if one simply took the projected FICA surplus, or in a second 
case, the projected FICA surplus plus the interest earnings and 
did that as an investment into the equity markets, whether 
collectively or through individual accounts. Using a static 
model that has been used by most estimators, just using this 
deterministic approach in the FICA surplus would still leave a 
75-year deficit of eight-tenths of 1 percent.
    If one invested the FICA surplus plus, the credited 
interest earnings on a static basis, it would produce at 
actually a 75-year surplus of 0.46 percent.
    Regrettably, the world is not deterministic. Markets go up. 
Markets go down. Economies ebb and flow. And using the dynamic 
portion of this model, more similar to what is used by Wall 
Street firms to assess financial risk, we find that using this 
the FICA surplus only is more likely to create a deficit of 
0.97 percent, and even using that plus interest income, a 
dynamic surplus of minus 0.7 percent.
    I would note that we looked at this, as the charts three 
and four underlined, as to cases where scenarios would produce 
positive returns and in approximately 15 percent of the 
scenarios, those would be positive instead of negatives.
    Last, collective investment, I would note, which is what 
these estimates did look at do not include some of the 
administrative costs or startup costs that would be 
attributable to individual accounts or annuitization costs, so 
we have actually provided a slightly more optimistic picture 
than would otherwise be the case.
    Administratively, I would also note that the current Social 
Security Administration, with its approximate cost of $10 per 
participant, per year, that $9.30 of that cost is actually the 
cost of paying the annuities. Only 70 cents is for the basic 
administration of the ongoing system. So some of the 
comparisons to date--most assessments of using individual 
accounts do not factor in that annuitization issue.
    In concluding, Mr. Chairman, I would simply note that we 
have included in our testimony as well an analysis of the 
implications for private employer plans and proposals such as 
the administration's USA proposal and would be happy in the 
future to do a specific analysis using the model for all 
Members of the Subcommittee. Thank you.
    [The prepared statement follows:]

Statement of Dallas L. Salisbury, President and Chief Executive 
Officer, Employee Benefit Research Institute

    The views expressed in this statement are solely those of 
the author and should not be attributed to the Employee Benefit 
Research Institute, or the EBRI Education and Research Fund, 
its officers, trustees, sponsors, or staff, or to the EBRI-ERF 
American Savings Education Council. The Employee Benefit 
Research Institute is a nonprofit, nonpartisan public policy 
research organization that does not lobby or take positions on 
legislative proposals.
    Mr. Chairman and Members of the Committee. I appreciate 
this opportunity to discuss Social Security's goals and 
criteria for assessing reforms.
    I appear today as President of the Employee Benefit 
Research Institute (EBRI), a non-profit research organization 
located here in Washington DC. EBRI does not lobby or advocate 
specific actions, but has worked for over 20 years to provide 
objective data and analysis that allows policy proposals to be 
    Our first book on Social Security was published in 1982,\1\ 
and we have conducted much work \2\ since then that has 
documented the critical role Social Security plays in providing 
income to the retired population, as well as to the disabled 
and survivors. The primary goals of Social Security have been 
to provide:
     A foundation of income for all Americans--which it 
has done.
     A nearly adequate income for the lowest-income 
Americans--which it does.
     Income protection against the ``risk'' of living 
much longer than one plans, or the actuarial tables suggest, by 
paying a life annuity that is indexed for inflation--which it 
     Dignity for retirees, by having the income paid 
through a government transfer rather than requiring family 
members to ask other family members for direct assistance.
     A level of taxation that permits a pay-as-you go 
program with a small reserve.
     A benefit that grows in real value by passing on 
productivity increases and life-style increases to retirees 
with a benefit formula that targets replacement of final 
income, as opposed to a constant level of purchasing power. 
(This increase in real purchasing power is shown in Chart 1. 
The chart also shows that increases in real purchasing power 
would remain, even if benefits were cut to allow for full 
funding under the present level of the FICA tax.)

    Many reform proposals now being discussed would change 
these goals to some degree. The criteria for assessing reforms 
should be to:
     Determine whether a reform proposal supports these 
goals, or changes them, and whether proposed changes are 
     Determine whether the reform fully utilizes the 
present administrative and recordkeeping structure, and if not, 
whether the reform proposal is feasible for implementation.
     Determine whether the reform proposal changes 
outcomes in terms of tax levels, benefit/income levels, and 
life income streams.
     Determine whether the reform proposal reduces risk 
in the system or increases risks.
     Determine whether the reform proposal strengthens, 
weakens, or has no affect on the existing system.
     Determine whether the affected public supports any 
fundamental reforms.
    Our 1997 book, ``Assessing Social Security Reform 
Alternatives,'' \3\ contains a first chapter which provides a 
detailed list of sub-questions in each of these areas. Our 
just-released 1999 book, ``Beyond Ideology: Are Individual 
Social Security Accounts Feasible?'' \4\ applies this 
methodology to individual account proposals.
    Also, the EBRI-SSASIM2 model that we have developed allows 
comparisons making use of analytic methods that are more 
complete and dynamic than what is being used by many advocates. 
Our model allows for the use of equity market return 
assumptions that are consistent with economic growth 
assumptions, and utilizes a thousand economic scenarios that 
introduce a full range of possible economic outcomes, as 
opposed to doing static straight-line projections. Our model 
uses earnings projections that reflect actual lifetime income 
patterns (based upon Bureau of Labor Statistics data), as 
opposed to the ``unisex flat earnings for typical households'' 
used by most analyses. This permits assessment of effects on 
more than just the ``average'' worker, and allows more accurate 
measurement of ``rates of return'' on individual accounts. Our 
model allows analysis of alternative forms of transition costs, 
and alternative payment periods for these costs (40 year versus 
70 years, etc.).

              Equity Investment of the Annual FICA Surplus

    One use of the EBRI model is to assess the program finance 
outcome of investing the annual FICA surplus--the annual amount 
of FICA taxes above the costs of the program for a particular 
year--into the equity markets or into individual accounts for 
workers. We modeled (first) the collective investment in 
equities of just the FICA surplus, and (second) the FICA 
surplus plus interest payments on the existing trust fund 
balance (which would remain in special-issue U.S. Treasury 
bonds). Using the actuarial assumptions from the1998 Social 
Security Trustees Report, when the model is in deterministic 
mode, the FICA-surplus-only investment has a 75-year actuarial 
balance of -0.08 percent of taxable payroll; but if the FICA 
surplus plus the interest from the bond investment is added, 
the actuarial balance becomes positive at 0.46 percent of 
taxable payroll (see Chart 2).

    But the real world is not deterministic, it is dynamic. 
Therefore, the model was also run in stochastic (or random) 
mode to evaluate what would happen if the future were allowed 
to have ups and downs in the economy, as it has in the past. In 
this mode, both levels of investment yielded an average 
negative 75-year actuarial balance of -0.97 percent of taxable 
payroll for FICA surplus only, and -0.70 percent of taxable 
payroll for FICA surplus plus interest. When examining the 
various scenarios, 91 percent of the scenarios resulted in a 
negative 75-year actuarial balance for the FICA-surplus-only 
case, while 85 percent of the scenarios had a negative 75-year 
actuarial balance for the FICA-surplus-plus-interest case (see 
Charts 3 and 4).

    This would be a best-case scenario because all of the 
surplus would be placed into equities, whereas if individuals 
were allowed to invest in individual accounts as they saw fit, 
some of the surplus would be invested in bonds. Furthermore, in 
our modeling we forced the equity percentage to increase by 
more than the annual FICA tax surplus regardless of the 
performance of equities over the 12-year period. This is 
realistic, since over 12 years it is highly improbable that 
bonds would outperform equities. In addition, once the program 
began to have expenses greater than revenue, funds were drawn 
down in a manner that left the equity percentage the same. 
Therefore, the investment in equities had a chance for long-
term returns. Lastly, collective investment does not account 
for all the additional start-up and administrative costs that 
would result from creating individual Social Security accounts, 
and these costs would be significant.
    Regarding administration, our analysis finds that a system 
of personal accounts would involve a number of distinct 
     First, employer deduction of payroll taxes and 
transmittal to a third party, with ultimate transmittal of 
records on whom each dollar belongs to.
     Second, receipt of the funds by a trust company or 
financial intermediary.
     Third, receipt of full information on the employee 
and the amount of money that went to the financial 
     Fourth, notice to the recordkeeper and the 
financial intermediary of how the money is to be invested.
     Fifth, either investment by the intermediary or 
the transmittal to an investment manager.
     Sixth, regular reporting on investment results to 
the recordkeeper so that account balances can be maintained.
     Seventh, a system for servicing the worker's 
account and providing information on the account, the 
investments, and details on choice.
     Eighth, education of the worker on the personal 
account system, what ``investments'' are, what a bond, a stock, 
and cash are, and on what actions they can or must take 
regarding his or her individual account.
     Ninth, a system for communicating ultimate annuity 
options and then paying the annuities. Each of these steps 
involves costs, with most estimates provided to date leaving 
out many of these costs, or providing ranges based upon 
frequency of choice designed into the system. Those studies 
make clear that the more responsive the system, the more 

                       Administrative Conclusions

    A system of personal accounts that applies to all who now pay 
Social Security taxes can only function at reasonable administrative 
cost if it takes full advantage of the present system of payroll tax 
deposits. Over 5 million employers still file all records on paper, and 
many make deposits only once each year (see Chart 5). Other approaches 
could be implemented but only at much higher cost to employers, 
workers, and the government.

    An individual accounts system that seeks to use the income tax 
system would be more difficult to make universal and would be more 
difficult to enforce, as it would be tied to over 140 million 
individuals rather than six million employers, as is currently the 
    Basing an individual accounts system on Federal Thrift Plan (TSP) 
or private 401(k) plans as a model is not an accurate comparison, since 
the covered populations are very different (see Chart 6) and thus the 
costs of recordkeeping and administration also would be very different. 
This is most true of wage levels, and thus the expected amount of 
annual contributions per account. Again, using the TSP or 401(k) model 
for individual Social Security accounts would involve much higher costs 
for employers, workers, and the government than is incurred under the 
present Social Security program.

    A major cost of any retirement program is the ultimate cost of 
paying benefits. Only with an ultimate annuity form of payment can a 
personal account be compared to the present system in terms of economic 
security. Social Security currently spends over 90 percent of its total 
administrative expense on annuitization and benefit payments.
    Most analyses to date of individual accounts do not include an 
estimate of this cost. As shown on Chart 7, administrative cost can 
substantially reduce benefit levels. Even without annuity cost, a 
recent analysis by the CATO Institute suggested costs of $55 to $115 
per worker per year for just the cost of account administration and 
funds investment. This did not include any expense for (1) education, 
or (2) compliance. The CATO analysis notes that any frequent reporting 
to workers, frequent investment changes, loans, or other features could 
substantially increase costs. A recent report from the Heritage 
Foundation notes that the system could make use of Electronic Funds 
Transfers to hold down employer costs, and suggested credit bureaus as 
the model for individual Social Security account administration. Most 
employers in the United States currently report their payroll taxes on 
paper, and the static records of credit bureaus have little of the 
dynamic nature of a personal investment account.

                 Benefit Effects of Individual Accounts

    When assessing reform proposals against the current Social 
Security system, it is important to note that an individual 
account provides a proportional benefit, meaning an equal 
percentage of pay contribution at each income level. As a 
result, the redistribution in the current system, or the ``non-
proportional'' delivery of benefits, is not reinforced by 
individual accounts. This is shown graphically in Chart 8, as 
the higher an individual's income, the higher the proportion of 
total benefits that derive from the individual account.

                 USA Accounts Impact On Employer Plans

    Whenever public or private employers want to create a 
retirement program, they must make a number of decisions. Since 
most employers have more than one retirement plan, part of the 
reason for careful analysis is to avoid causing harm to other 
programs. Depending on how it is designed, a Universal Savings 
Account (USA) could be designed to avoid adverse consequences 
for employer plans, or it could potentially cause 
nondiscrimination problems for a significant percentage of 
employer plans. It is premature to predict what the eventual 
outcome of these ``testing problems'' may be on a plan-specific 
basis; however, most sponsors would need to consider a 
redesign--perhaps a drastic one--of their plans, and 
undoubtedly some plan sponsors would seriously consider the 
elimination of their plans. Termination of plans could reduce 
retirement savings, the opposite of the intended result of USA 
account creation. The primary employer design factors for 
retirement programs are as follows:

      Possible USA Features            Option I            Option II
1. Employer Contributions.......  Taxable Now.......  Tax Deferred
2. Worker Contributions.........  Taxable Now.......  Tax Deferred
3. Investment Earnings..........  Taxable Now.......  Tax Deferred
4. Matching Contributions.......  Amount of Match     Amount of
                                   (50%; 100%).        Contribution
                                                       Matched (x% of
                                                       pay or some flat
5. Timing of Contributions......  End of Year.......  Each Pay Period
6. Investment Options...........  One/Few...........  Many

    The characteristics in bold are the most common in 
employer-sponsored individual account plans today. To the 
degree that a new mandatory universal government program were 
less generous employer plans, one would expect that employees 
would continue to participate in the employer plan. For 
example, if the employer's 401(k) plan offers no match but 
includes payroll deduction each pay period and several 
investment options, while the government plan offers no match, 
few investment options, and a contribution once each year, the 
worker would likely remain in the employer plan.
    However, to the extent that a new mandatory universal 
government program were more generous than employer plans, one 
would expect that employees would stop or reduce their 
participation in the employer plan. For example, if the 
employer plan offers no match, payroll deduction each pay 
period and several investment options, while the government 
plan offers a 50 percent match up to $600 in worker 
contributions, few investment options, and a contribution once 
each year, the worker would likely drop out of the employer 
plan and move funds to the government plan in order to get the 
    To the extent that the new plan has the worker's 
contribution come out of taxable income, so that taxes are not 
deferred, then the balance shifts back in favor of the employer 
plan, all other things being equal. For example, if an employer 
has no matching contribution, a government program with a match 
could affect participation in the employer plan.

Why Would It Matter if Workers Reduce Their Participation In 
Employer Plans?

    The tax laws that apply to employer plans are extensive and 
complex. Most relevant here are the ``nondiscrimination 
rules,'' which, put simply, ``test'' 401(k) plans for 
relatively equal deferrals (expressed as a percentage of 
compensation) between lower-paid and higher-paid workers. In 
general, for ``highly compensated employees'' (known as HCEs, 
or those paid $80,000 a year or more) to contribute to a 
retirement plan, the ``non-highly compensated employees'' 
(NHCEs, or those paid less than $80,000 a year) also must do 
so.\5\ Further, what the HCEs can contribute to the plan is a 
direct function of what the NHCEs contribute. This means that 
if the lower-paid workers choose not to participate or 
contribute, the higher-paid workers would be substantially 
frozen out--and there would be no reason for the employer to 
sponsor the retirement plan.
    As a matter of public policy, Congress could also make this 
issue irrelevant by repeal of the nondiscrimination rules that 
apply specifically to 401(k) plans.\6\ If this happened, the 
level of participation by the NHCE group would not matter to 
the HCE group. But since repeal is unlikely, we provide 
    The Clinton administration, it must be noted, has been 
meeting with many groups in an effort to complete the design of 
its USA program in a form that would not have an adverse impact 
on employer plans. It is our hope that this good-faith effort 
by the administration will lead to design decisions that 
minimize or avoid any adverse impact on employer-based 
plans.\7\ This analysis is provided to assist in those efforts. 
For example, a USA-type plan design that:
     Provides an automatic (non-matched) employer/
government contribution that is tax-deferred (the same as in a 
401(k) plan);
     Requires employee contributions to be taken from 
taxable income (while 401(k) contributions are tax-deferred); 
     Provides no matching contribution;
    would clearly provide a set of limited incentives which 
would be insufficient to cause employees to leave an employer 
plan, and most employees would consider themselves to be better 
off contributing to the employer plan (where available) than to 
the government plan.
    Were there to be a government-provided match, however, then 
workers in an employer plan with no match might be better off 
in the USA, depending on the level of the match and whether the 
match contribution is treated as taxable income or is tax-
    For a number of design and administrative reasons, the 
Clinton administration is unlikely to propose what was 
mentioned in the State of the Union Message and described 
through examples in a White House fact sheet. However, we have 
used that plan for this analysis to show how much of a 
difference plan design can make and why the administration is 
wise to work hard on the design issue.

USA Analysis

    Recently the Employee Benefit Research Institute and the 
Investment Company Institute have completed a two-year study of 
the 401(k) market \8\ which has yielded detailed individual 
participant records (including demographic information and 
contribution behavior) from more than 27,000 plans. Due to 
strict confidentiality standards, no information on the plan 
sponsor's identity was included. However, the database does 
break out source of contributions (e.g., employee before-tax, 
employee after-tax, employer matching, qualified non-elective 
contributions (QNECs), etc.) and we are currently working on a 
set of computer algorithms to classify each plan by the types 
of incentives provided to employees at various contribution 
levels (e.g., a 2 percent QNEC plus 100 percent match for the 
first 3 percent of compensation and a 50 percent match for the 
next 3 percent of compensation).
    When completed, this analysis will provide unique insight 
into how participating employees at various compensation levels 
may be expected to react to various formulae adopted by the 
employer. It will also provide the basic framework for 
sensitivity analysis into the likely impact of modifications in 
the 415(c) and/or 402(g) limits.
    Given the political timeline, we do not have the luxury of 
completing the pattern recognition algorithms necessary to 
identify the contribution formulae of 27,000 plans. However, we 
have taken a random sample of 6,700 plans to provide some 
initial insights into this policy. While this is just a small 
fraction of the year-end 1996 information we have collected, we 
believe it is still much more comprehensive than any other 
research database in existence.\9\
    It is important to note that for the preliminary analysis 
we are substituting the participant-specific average employer 
match for the marginal match.\10\ The analysis conducted by 
Yakoboski and VanDerhei (1996) and Kusko, Poterba and Wilcox 
(1994) both demonstrate the need to consider the incentive 
effects of the employer's matching formulae. Our final analysis 
of this proposal will provide a general framework for each plan 
in which the total participant's contribution is modeled as 
follows: \11\
    Total contribution = employee deferral + employer match + 
QNEC, where:
     Employee deferral will be subject to Internal 
Revenue Service Sections 402(g) and 415(c), and potential ADP/
ACP restrictions,
     Employer match will attempt to replicate the 
contribution formula in place for plan x in year t (e.g., 100 
percent match on employee contributions up to the first 3 
percent of employee compensation plus 50 percent match on 
additional employee contributions up to the next 3 percent of 
employee compensation),\12\ and
     QNECs are determined as the amount of employer 
contribution that is provided regardless of employee deferral 
(e.g., 2 percent of compensation).
    This substitution of variables would be expected to bias 
the results if we were attempting to analyze contribution 
behavior at the margin for the types of formulae seen in actual 
401(k) plans where there is expected to be a significant 
decrease in contribution incentives after approximately the 
first 6 percent of compensation and a complete ban on deferrals 
after the first $10,000.\13\ However, as long as our analysis 
reflects only the relatively small level of employee 
contributions discussed thus far (i.e., no more than $600 per 
year), this substitution is not likely to be significant.
    For purposes of passing a nondiscrimination test unique to 
401(k) plans (the so-called ADP tests), it is of utmost 
importance that non-highly compensated employees choose to 
participate in the sponsor's plan. It is logical to assume that 
if any employee with limited investible funds finds an 
alternative arrangement with a higher match rate that they may 
choose to reallocate some or all of their future contributions 
from the 401(k) plan to the USA plan. To what extent is this 
likely to happen in the existing plan population? Our findings 
are summarized below.


    The analysis consisted of the following steps:
    A representative random sample of approximately 6,700 
401(k) plans was taken from the EBRI/ICI 401(k) database in 
which there was sufficient information to determine employee 
deferral percentages and employer match rates for at least 90 
percent of the participants in the plan.
    Average match rates for each participant with the requisite 
information were computed.
    Each participant was categorized as to whether they were a 
highly compensated employee (HCE) or non-highly compensated 
employee (NHCE).
    Each participant was categorized as being ``at risk'' or 
not. We defined a participant to be in the former category if 
the employer average match rate was less than 50 percent.\14\
    Average deferral percentages were computed for each plan 
for the HCEs (ADPH) and the NHCEs (ADPN).
    Each plan was tested to see if it passed the basic ADP 
test: ADPH  ADPN * 1.25.
    Each plan was tested to see if it passed the alternative 
ADP test: ADPH  min(ADPN * 2, 
ADPN + 2%).
    Any plan that did not pass either of the above two tests 
was excluded from further analysis.\15\
    At this stage of the analysis, there are several potential 
methods of modeling the likely impact from a competing plan 
with matching contributions. Two methods were chosen to 
illustrate the importance of behavioral assumptions in 
quantifying the likely impact.\16\
     Method One: Assume any NHCE that is ``at risk'' 
drops out of the employer's 401(k) plan while HCEs continue 
their current contribution.
    This ``all or nothing'' response to a governmental 
competing matching plans could be justified on several grounds. 
First, HCEs may not be eligible to benefit from a government 
match due to potential constraints on adjusted gross income 
(AGI). Second, it is highly unlikely that employees with 
salaries of at least $80,000 would leave the employer plan for 
a 50 percent match on only $600 (at most 0.75 percent of 
    The ADPs are recomputed and the percentage of plans that 
would be in violation of both the basic and alternative tests 
(assuming no corrective measures were taken) are tabulated and 
shown in Chart 9.

     Method Two: Allow the substitution to be 
    Given that a significant percentage of NHCEs are deferring 
more than $600, a problem with method one is that if a NHCE 
were already putting in $1,000 for a 25 percent match with the 
employer's current plan, why not assume that they would put in 
$600 to a 50 percent match for the government's plan and leave 
the other $400 in the employer's 401(k) plan? This method 
subtracts $600 (or the participant's current deferral, if less) 
from each participant and recomputes their ADP's.
    The percentage of plans that would be in violation of both 
the basic and alternative ADP tests (assuming no corrective 
measures were taken) are tabulated and shown in Chart 10. It 
should be noted that this estimate of the number of plans 
impacted would need to be re-estimated if AGI thresholds were 
imposed for eligibility in the government's matching program.

Preliminary results

    Chart 9 illustrates the estimated percentage of 401(k) 
plans that would be in violation of the ADP tests assuming any 
NHCE that is ``at risk'' drops out of the employer's 401(k) 
plan while HCEs continue their current contribution. Overall, 
26 percent of all private 401(k) plans are expected to be 
impacted under this assumption. The percentage of plans is 
obviously a function of plan size, with only 15 percent of 
plans with 1-9 participants being impacted, increasing to 35 
percent of the plans with 50-99 participants. The impact 
decreases for larger plans; slightly less than 25 percent of 
the plans with more than 500 participants were estimated to be 
    Chart 10 illustrates the estimated percentage of 401(k) 
plans that would be in violation of the ADP tests assuming all 
employees with a match rate of less than 50 percent transfer up 
to $600 of their contributions from the employer's 401(k) plan 
to the government's plan. The estimated impact is obviously 
much smaller, since some NHCEs that are assumed to be making 
zero contributions in method one would still have some 
contributions in method two (leading to a higher 
ADP and all HCEs considered to be ``at 
risk'' in the second method would have a smaller deferral than 
in method one (leading to a smaller ADP).
    Approximately 13 percent of all 401(k) plans are estimated 
to be impacted under method two. This varies from a low of 7 
percent for plans with less than 10 participants, to a high of 
21 percent for plans with 50-99 participants.
    In terms of the number of participants impacted, the plans 
estimated to be impacted under method one covered 9.7 million 
participants at the end of 1996 (approximately 26 percent of 
the universe). Method two suggests that the impacted plans had 
3.9 million participants at the end of 1996 (approximately 11 
percent of all 401(k) participants).
    I have made available to the Committee our studies 
completed to date, and offer our assistance in carrying out 
additional studies. I have also attached to this statement a 
set of slides intended to add detail to some of the points 
contained in my statement, including the results of a 1998 
survey of small employers to determine attitudes on personal 
    I thank the Committee for this opportunity to appear before 
you today and wish you the best as you seek to assure future 
retirement income security.


     Allen, Jr., Everett T., Joseph J. Melone, Jerry S. Rosenbloom and 
Jack L. VanDerhei, Pension Planning: Pensions, Profit Sharing, and 
Other Deferred Compensation Plans, Eighth edition, Homewood, Illinois: 
Richard D. Irwin, Inc., 1997.
    Clark, Robert L. and Sylvester J. Schieber, ``Factors Affecting 
Participation Rates and Contribution Levels in 401(k) Plans,'' in 
Olivia S. Mitchell and Sylvester J. Schieber, eds. Living with Defined 
Contribution Pensions: Remaking Responsibility for Retirement 
(Philadelphia: University of Pennsylvania Press, 1998).
    Kusko Andrea L., James M. Poterba, David W. Wilcox. Employee 
Decisions with Respect to 401(k) Plans: Evidence From Individual-Level 
Data. NBER Working Paper No. 4635, 1994
    VanDerhei, Jack L., Russell Galer, Carol Quick and John D. Rea. 
``401(k) Plan Asset Allocation, Account Balances, and Loan Activity,'' 
EBRI Issue Brief, January 1999.
    Yakoboski, Paul J. and Jack L. VanDerhei, ``Contribution Rates and 
Plan Features: An Analysis of Large 401(k) Plan Data.'' EBRI Issue 
Brief, June 1996.


    \1\ Social Security: Perspectives on Preserving the System, ISBN 0-
    \2\ For example, ``Retirement in the 21st Century..Ready or Not'' 
(1994, ISBN 0-86643-081-4), which deals with the preparation of the 
baby boom for retirement.
    \3\ ISBN7125.A783
    \4\ ISBN 0-86643-092-X
    \5\ Technically, it is possible for plan sponsors to also use non-
elective contributions to satisfy these tests as long as these 
contributions satisfy special vesting and withdrawal restrictions.
    \6\ While the analysis below focuses exclusively on the ADP tests, 
a complete analysis of the public policy implications would require 
similar analysis on employee after-tax and employer matching 
contributions as well as the multiple use test and the potential for 
401(k) sponsors to adopt the newly implemented safe harbors. See 
Chapter 11 of Allen, Melone, Rosenbloom and VanDerhei (1997) for an 
    \7\ It is important to note that we are referring exclusively to 
private 401(k) plans in the analysis below and that Section 403(b), 
Section 457 and public plans may or may not have similar consequences 
based on this proposal.
    \8\ See VanDerhei, et. al. (1999). Analysis of account balances and 
loan information was provided in addition to asset allocation 
    \9\ Both Yakoboski and VanDerhei (1996) and Clark and Schieber 
(1998) had a large number of participants but what matters in this type 
of analysis is that a sufficient number of plans be available to 
determine the distribution of match rates by salary.
    \10\ This variable has been used extensively in the academic 
literature on an aggregate basis; however, our data provides more 
powerful analysis since we are able to look at the average match for a 
particular individual and observe their specific deferrals.
    \11\ We will also control for the impact of both before-tax and 
after-tax employee contributions. Note this is likely to be extremely 
important if the final government plan design involves after-tax 
employee contributions.
    \12\ N.B.: some plans involve a more complex function, possibly 
incorporating the sponsor's profits.
    \13\ For purposes of the 1996 data used in this analysis, the 
402(g) limit was $9,500.
    \14\ See Internal Revenue Code Section 414(q) for a definition. 
Technically, the simplified definition of HCEs implemented by the Small 
Business Job Protection Act of 1996 had not taken effect as of year end 
1996 however we used the new definition to be more relevant for 
predictions of impact on plans in the post 1996 environment. Moreover, 
no information on the 5% owner classification is available in this 
    \15\ This accounted for less than 1 percent of all plans in the 
sample. Technically, 401(k) plans now have the flexibility to use the 
ADP generated by NHCEs in the previous year to test whether the current 
year's ADP for HCEs is too high. This modification was not included in 
the current analysis since the database is temporarily limited to 1996 
contribution information.
    \16\ A third method will be attempted as soon as the database is 
expanded to include information on eligible employees that choose not 
to contribute. Although the two methods used in these illustrations 
produce conservative estimates of the impact, they are not precise in 
that we are currently unable to observe non-participant eligibles that 
drag the ADP for NHCEs down further than HCEs.
    \17\ Technically, the smaller plans are more likely to have no HCEs 
among their participants and therefore relatively immune to the impact 
of a competing governmental plan on their ADP test. This influence 
gives way to the fact that larger plans appear to have more generous 
matches and thus are less likely to have NHCEs considered to be ``at 

    [The attachments are being retained in the Committee 


    Chairman Shaw. Thank you.


    Mr. Primus. Mr. Chairman, I appreciate very much your 
invitation to testify.
    My understanding of the overall budgetary framework you are 
considering is as follows: continue to abide by the 
discretionary caps through the year 2002 in holding nondefense 
discretionary spending below inflation after 2002; enacting 
substantial tax cuts which match the size of the on-budget 
surplus; and then using much of the Social Security surplus to 
establish individual accounts. If this actually became law, 
there is a large risk that the outcome would be large budget 
deficits, little reduction in the debt burden, severe 
reductions in nondefense discretionary spending, and 
significant new spending on the elderly.
    These discretionary cuts are unrealistic. There is little 
evidence to suggest that the appropriation bills can pass 
Congress and be enacted that actually live within those limits. 
Look at the 1999 appropriations process. The caps were 
considerably less tight, and yet substantial funding had to be 
designated as emergency. Or look at the bill the Senate passed 
several weeks ago increasing military pay and pensions. The 
reality is that the discretionary caps will be increased; the 
only questions are when and by what amount.
    These unrealistic discretionary cuts are then turned into 
permanent tax cuts under the budget resolutions. By the year 
2007, the annual cost of the tax cuts exceeds the amount of the 
on-budget surplus. The tax cuts are paid for by furthering 
reductions in nondefense discretionary spending. And after the 
year 2009, the problem becomes greater. CBO baseline 
projections indicate that the non-Social Security surplus stops 
growing. But the cost of the tax cuts will likely to continue 
to grow, and the result is the tax cuts would result in a 
return of deficits in the non-Social Security budget.
    A similar result occurs in the Social Security off-budget 
accounts. The Social Security plans now under consideration 
would establish individual accounts without reducing Social 
Security benefits. These plans require large amounts of 
additional funding, which cannot come from the non-Social 
Security Surplus, because they have been used for tax cuts. The 
funding must come from the Social Security surplus. However, 
very soon, the cost of these individual accounts would exceed 
the entirety of the Social Security surplus. At that time, this 
framework would require new taxes or even deeper cuts in the 
rest of government or deficit spending. Individual accounts are 
essentially a new entitlement program.
    At a time when we have not fully funded the promises we 
have made to the elderly under the current Social Security 
program, and when we face large financing gaps in Medicare and 
unmet needs in other areas, why should we enact a Feldstein-
type plan which would make new promises to the elderly and 
direct substantial new resources to retirement pensions without 
increasing government revenues to defray these added costs.
    The plan poses as a free lunch entailing no pain or tough 
choices. One criterion which should be used to assess Social 
Security plans is whether they boost national savings. I think 
the congressional plans fall short here. Tax cuts will 
primarily increase current consumption. Another criterion 
should be whether the plan provides adequate benefits that are 
equitably distributed and represent a fair return. Individual 
account plans generally result in a less progressive 
distribution of benefits that Social Security today.
    One frequently hears the argument that individual accounts 
yield much higher rates of return than Social Security. This is 
not correct. A recent Center paper, by Peter Orszag, summarizes 
an important set of papers by three economists, some of whom 
are sympathetic to individual accounts. The major finding of 
their work is that it is advanced funding that increases rates 
of return, not individual accounts. Advanced funding will raise 
rates of return, whether it occurs through individual accounts 
or Social Security.
     Another criterion is protection against risk. The 
Feldstein plan does provide ample protection against risk, 
because it guarantees participants their Social Security 
benefits. However, the plan is likely to undermine political 
support for Social Security as we know it today. Because people 
would seem to be paying substantial payroll taxes and getting 
little back from it, Social Security would appear to much of 
the middle class and more affluent segments of the population 
to be a bad deal.
    A tax--I could not agree more with Mr. Walker--a tax or an 
integration factor of 75 to 90 percent, I believe is 
politically unsustainable. How can you give the American public 
an account, which they manage, and which public officials say 
is theirs, and then take almost all of it back when they 
    Another key question is whether 75-year solvency has been 
restored and maintained. The President's plan receives high 
marks for its emphasis on reducing the public debt. However, in 
my opinion, both plans--the Feldstein plan and the 
administration's--fall short on the fiscal discipline.
    Under the Feldstein plan promises to the elderly are 
increased. There are massive infusions of general revenues. 
There are no structure reforms, and revenues are not explicitly 
increased. In addition, the publicly held debt would not be 
reduced very much.
    Let me say, in conclusion, Mr. Chairman, you consistently 
argued during the welfare debate that the States were doing the 
right thing and that the Federal Government should take its cue 
from what the States were doing. I believe in your new role, 
Mr. Chairman, you should continue to follow your own advice and 
have the Federal Government adopt two policies that the States 
are doing on a regular basis, and that is investing a 
considerable portion of their pension funds, the Social 
Security funds in equities.
    And second, the States do manage and have learned how to 
set aside their pension funds and not spend or give them away 
in tax cuts.
    The Federal Government should be able to do the same thing. 
We should not need the mechanism of individual accounts to 
partially advance fund our Social Security system. Thank you.
    [The prepared statement follows:]

Statement of Wendell Primus, Director of Income Security, Center on 
Budget and Policy Priorities

    Mr. Chairman and Members of the Subcommittee on Social 
    I very much appreciate your invitation to testify on the 
subject of the overall budget framework and Social Security 
program's goals and criteria for assessing reform proposals. My 
name is Wendell Primus and I am Director of Income Security at 
the Center on Budget and Policy Priorities. The Center is a 
nonpartisan, nonprofit policy organization that conducts 
research and analysis on a wide range of issues affecting low-
and moderate-income families. We are primarily funded by 
foundations and receive no federal funding.

 The Overall Budgetary and Social Security Framework of Congressional 

    My understanding of the overall budgetary and Social 
Security framework assumed under the House and Senate budget 
resolutions is as follows:
     Continuing to abide by the discretionary caps 
through 2002 and holding non-defense discretionary spending in 
most years after 2002 below the 2002 inflation-adjusted level 
(although modestly above a freeze level),
     Enacting substantial net tax cuts of $778 billion 
over 10 years, which would nearly equal the estimated size of 
the on-budget surplus over this period, and
     Using much of the Social Security surplus to 
establish individual account plans and employing a variant of 
the Feldstein approach.
    I would like to comment briefly on the feasibility and 
economic ramifications of this framework, discuss criteria for 
how to judge Social Security reform and compare alternative 
Social Security plans under those criteria and conclude with a 
few thoughts on an alternative framework.

Understanding the Economic and Budgetary Implications of this Framework

    What we have learned over the past several weeks about the 
Senate and House budget resolutions is cause for serious 
concern from a fiscal discipline point of view. If this 
framework were enacted, there is a large risk that the eventual 
outcome would be a return of large budget deficits, little 
reduction in the debt burden we would pass on to our children 
and grandchildren, severe reductions in non-defense 
discretionary spending, large tax cuts that grow in size over 
time, and significant new spending on the elderly. Policymakers 
are promising more than can be delivered within the available 
budgetary resources, especially once we get a few years past 
the end of the 10-year budget window in FY 2009 and the baby 
boom generation begins to retire in large numbers.

                 Unrealistic Discretionary Budget Cuts:

    The budgets the Senate and House Budget Committees have 
approved would require radical shrinkage over time in some 
parts of the federal government. Not only would the budget 
plans maintain the stringent caps the 1997 budget agreement 
placed on discretionary (i.e., non-entitlement) spending for 
years through 2002--which themselves would require sizeable 
reductions in discretionary spending in the next several 
years--but the budgets call for large additional reductions in 
non-defense discretionary programs in the years after that.
     The Senate and House budget resolutions include 
approximately $200 billion in additional reductions in 
discretionary programs between 2003 and 2009, on top of the 
reductions that would result from enforcing the caps through 
2002 and holding discretionary spending in fiscal years 2003 
through 2009 to the fiscal year 2002 cap level, adjusted for 
inflation. These additional reductions in discretionary 
programs provide room for larger tax cuts than could otherwise 
be accommodated.
     The cuts the House Budget resolution contains in 
non-defense discretionary programs are so large that by 2009, 
overall non-defense discretionary spending would be 29 percent 
below its FY 1999 level, adjusted for inflation.\1\ These deep 
cuts would occur although non-defense discretionary spending 
already constitutes as small or smaller a share of the Gross 
Domestic Product than in any year since 1962. Discretionary 
cuts of this magnitude are unrealistic.
    \1\ The FY 1999 level used here as a point of reference excludes 
emergency spending. If emergency spending were included, the dimensions 
of the discretionary cuts in the budget resolution would seem deeper.
    One fact that I find astonishing is if discretionary 
spending is allowed to grow just enough to preserve the same 
inflation-adjusted amount of resources available to 
discretionary programs as is available to these programs this 
year, not including the emergency spending in fiscal year 1999, 
discretionary spending would use up $824 billion--or 88 
percent--of the non-Social Security surplus. In other words, 
all of the projected non-Social Security surplus is due to 
assumed reductions in discretionary programs.
    The CBO baseline projections assume that policymakers will 
keep spending within the discretionary caps.\2\ There is, 
however, little evidence to suggest that appropriations bills 
can pass Congress and be enacted that actually live within 
those limits. Look at the 1999 appropriations process. The caps 
were considerably less tight and yet substantial funding had to 
be designated as ``emergency.'' In addition, the bill the 
Senate passed several weeks ago on military pay and pensions 
increases both discretionary spending and entitlement costs. 
According to CBO, the legislation increases discretionary 
spending by $40.8 billion over the next 10 years, with the 
costs rising each year. The costs reach $6.5 billion a year by 
2009 and would continue to rise for a number of years after 
that. This requires Congress and the President to agree to make 
even deeper cuts in other discretionary programs (possibly 
including other defense programs). Including entitlements and 
revenues, the bill's total cost is $55 billion over 10 years.
    \2\ More precisely, the CBO projections assume that discretionary 
spending will fit within the caps for as long as they are in place. 
After 2002, when the caps are no longer in place, the projections 
assume that discretionary spending will grow with inflation.
    The reality is that the discretionary caps will be 
increased. The only questions are when Congress will adjust the 
caps and by what amount.
    Tax Cuts Should Wait Until Social Security and Medicare 
Programs Have Been Strengthened
    The proposed House and Senate budget resolutions include 
tax cuts designed to absorb most of the on-budget (non-Social 
Security) surplus for the next ten years. To follow the path of 
the anticipated surplus, the tax cuts start relatively small 
and grow substantially over time. The proposed resolutions 
include tax cuts costing $142 billion over the first five 
years, with the cost rising to $636 billion in the second five-
year period.
    In fact, by 2007 the annual cost of the proposed tax cuts 
exceeds the amount of the on-budget surplus the Congressional 
Budget Office estimates will be available.\3\ The additional 
tax reduction is ``paid for'' by further reductions in non-
defense discretionary spending, beyond those that result from 
adhering in years after 2002 to the cap for FY 2002, adjusted 
only for inflation.
    \3\ These figures are based on CBO's ``capped baseline,'' which 
assumes that discretionary spending will increase with inflation after 
the current caps expire in 2002. This is the standard baseline that CBO 
and OMB use to estimate the extent to which the budget will be in 
deficit or surplus.
    Looking beyond 2009, the problem becomes still greater. 
Three factors suggest these tax cuts will become unaffordable 
after 2009 and would almost certainly bring back deficits in 
the non-Social Security budget.
     CBO baseline projections indicate that the non-
Social Security surplus stops growing and begins to shrink 
during the five years after 2009.\4\ Once the surplus stops 
mounting and begins to contract, there will be a smaller non-
Social Security surplus each year to support a tax cut.
    \4\ The CBO baseline goes through 2009. The CBO capped baseline was 
extended to 2014 for purposes of this analysis by applying the growth 
rates in the CBO long-term forecast. The projections show that annual 
surpluses in the non-Social Security budget begin to decline after 
2012. Policy changes could shift by one or a few years the specific 
year in which these surpluses begin to shrink, but such shrinkage is 
virtually certain to occur some time shortly after the baby boom 
generation begins to retire.
     But the cost of the tax cut is likely to continue 
growing substantially after 2009. The size of the tax cut in 
the Senate resolution grows from $32 billion in 2003 to $177 
billion in 2009, an annual average increase in cost of more 
than $24 billion a year. Between 2008 and 2009, the cost grows 
by $26.5 billion.\5\ If this incremental growth were to 
continue in the years beyond 2009, the cost of the tax cut 
would rise from $636 billion in 2005-2009 to $1.25 trillion in 
the five years from 2010 to 2014.
    \5\ In the Senate budget resolution, the size of the tax cut grows 
by an average of $24.2 billion a year between 2003 and 2009, while in 
House version the average annual growth is $24.6 billion. In the House 
version, the cost grows from $30.7 billion in 2003 to $178 billion in 
2009, and growth between 2008 and 2009 is $24.8 billion.
    Even if growth in the tax cut could be held down to the 
rate of growth in GDP in years following 2009--which is 
unlikely because it would require reductions in tax relief at 
that time--the cost of the tax cut in the five years from 2010 
to 2014 would still exceed $1 trillion. (See Figure 1.)
     With the size of the non-Social Security surpluses 
beginning to decline and the cost of the tax cut continuing to 
grow, the only way to avoid a re-emergence of on-budget 
deficits would be to make cuts in programs on top of those that 
would made by 2009. Such cuts, which could entail eliminating a 
sizable share of what remained in non-defense discretionary 
spending, are not likely to be achievable. As a result, the tax 
cuts in the House and Senate budget resolutions would likely 
result in a return of deficits in the non-Social Security 

    The projected surpluses present policymakers with a once-
in-a-generation choice. You can spend those surpluses by 
cutting taxes or raising government spending and thus boosting 
current consumption. Or you can save those surpluses by paying 
down the debt held by the public, by strengthening Social 
Security and Medicare, and raising national saving, investment 
and long-term economic growth.
    Tax Cuts Should Wait Because of the Economic Uncertainty 
Surrounding These Budget Projections
    Furthermore, if Congress and the President pass legislation 
this year that is projected to result in balance or modest 
surpluses in the non-Social Security budget but the economy 
subsequently weakens and grows more slowly than CBO has 
forecast, the non-Social Security budget will likely slide back 
into deficit during the next ten years. The resulting deficits 
could be substantial. CBO estimates that a downturn of the size 
of the recession of the early 1990s, which was not a severe 
recession as recessions go, would increase the budget deficit 
(or reduce surpluses) by approximately $85 billion a year just 
after the recession hits bottom.
    CBO cautions that its surplus forecasts could be off by 
even larger amounts if revenues grow more slowly than forecast. 
Analysts do not fully understand why revenues have grown more 
rapidly than projected in recent years, and they do not know 
the extent to which the factors that have caused this 
unexpected revenue growth are temporary or permanent. Revenue 
growth in future years could be significantly lower or higher 
than CBO currently projects. If it is significantly lower (and 
legislation using most of the non-Social Security surpluses 
currently projected has been enacted), deficits in the non-
Social Security budget are likely to return.
    A drop in the stock market also would result in lower-than-
expected revenue collections, since less capital gains tax 
would be collected. That, too, could push the non-Social 
Security budget back into deficit.
    CBO this year devoted a full chapter of its annual report 
on the budget and the economy to the uncertainty of its budget 
projections. CBO warned that ``considerable uncertainty'' 
surrounds its budget estimates ``because the U.S. economy and 
the federal budget are highly complex and are affected by many 
economic and technical factors that are difficult to predict. 
Consequently, actual budget outcomes almost certainly will 
differ from the baseline projections...'' \6\ CBO reported that 
if its estimate of the surplus for 2004 proves to be off by the 
average amount that CBO projections made five years in advance 
have proven wrong over the past decade, the surplus forecast 
for 2004 could be too high or too low by $300 billion.
    \6\ Congressional Budget Office, The Economic and Budget Outlook: 
Fiscal years 2000-2009, January 1999, p. 81.
    A much more prudent course would be to wait several years 
before enacting any substantial tax cuts to see if on-budget 
surpluses of the magnitude now projected actually appear, to 
determine if our unusually long-lasting economic recovery 
continues to last (the probability is high that a recession 
will occur sometime between now and 2009), and to determine the 
levels of a realistic set of discretionary caps needed to enact 
the 13 appropriations bills.
    Feldstein type Plans Increase Spending on the Elderly, 
Undermine Social Security as We Know It and Are Not Adequately 
    The Social Security plans now emerging in Republican 
leadership circles appear to envision using the bulk of the 
Social Security surpluses to fund individual accounts. The 
Social Security proposal that I understand Chairman Shaw to be 
developing, as well as the plan Senator Phil Gramm has crafted, 
would establish individual accounts apparently without reducing 
Social Security benefits. Such plans require large amounts of 
additional funding for a number of decades. Under the proposed 
budget resolutions, these new funds could not come from the 
non-Social Security surplus, since the vast majority of that 
surplus would be used for tax cuts. This leaves only one source 
for funding these accounts--the Social Security surpluses. 
However, after about 2012, the Social Security surplus is 
projected to stop growing each year and start to decline, while 
the cost of funding these individual accounts would continue to 
increase. As a result, sometime in the five-year period from 
2010 to 2014, the cost of individual accounts equal to two 
percent of Social Security wages would exceed the entirety of 
the Social Security surpluses. At that time, this plan would 
require new taxes, even deeper cuts in the rest of government 
or deficit spending. Individual accounts are essentially a 
large new entitlement program.
    At a time when we have not fully funded the promises we 
have made to the elderly under the current Social Security 
program, and when we face large financing gaps in Medicare and 
unmet needs in other areas, the Feldstein plan would make new 
promises to the elderly and direct substantial new resources to 
retirement pensions without increasing government revenues to 
defray these added costs. The plan poses as a ``free lunch'' 
entailing no pain or tough choices. In reality, the plan would 
be likely to put programs funded through general revenues at a 
substantial disadvantage and to sacrifice the needs of younger 
generations to increase benefits directed to the elderly, 
especially the more affluent elderly.
    The plan also would weaken the progressive nature of the 
current benefit structure, widening the nation's already-large 
income disparities. In addition, it would establish a hybrid 
private account/Social Security benefit structure not likely to 
be politically sustainable over time. The plan would set in 
motion a dynamic that could lead eventually to the dismantling 
of much or all of Social Security as we know it today.

Summary of Economic and Budgetary Implications of Congressional Budget 

    The emerging Republican budget and Social Security 
proposals risk exacerbating the serious fiscal problems the 
nation faces when the baby-boom generation retires. Since the 
tax cuts would use up the on-budget surplus while most of the 
Social Security surplus was used for individual accounts, there 
would be little debt reduction. As a result, these proposals 
would squander a historic opportunity to reduce sharply or 
eliminate the debt held by the public, and future generations 
would be burdened with obligations to continue making large 
interest payments on the debt far into the next century. Even 
if deficit spending is avoided during the next 10 years, the 
likelihood is high that in the next five-year budget window, 
our public debt would again increase.
     On-budget surpluses would head back to deficits 
because currently projected on-budget surpluses stop growing 
after 2012 while the tax cuts would continue to mount.
     Off-budget surpluses head back to large deficits 
at approximately the same time because the cost of individual 
accounts would exceed the Social Security surpluses.
     Aggravating these problems, interest payments 
would still be around $200 billion a year because there would 
have been little debt reduction over the previous ten years.
    CBO already projects fiscal difficulty when the boomers 
retire, with deficits returning sometime between 2020 and 2030 
and climbing to record levels. Moreover, those projections 
assume that all the surpluses are used solely for debt 
reduction. Under the tax cut and individual account proposals 
just discussed, deficits would return much sooner and climb 
much higher.
    In addition, these budget proposals would require cuts of 
stunning depth in non-defense discretionary programs. Due to 
the magnitude of these cuts, some programs that constitute 
public investments and hold promise of improving productivity--
and hence economic growth--could face the knife, as could many 
programs to aid the most vulnerable members of society. Of 
course, cuts of such magnitude might not be made given their 
political difficulty. But then the overall fiscal picture 
becomes even grimmer, given the costs of the tax cuts and the 
individual accounts.
    The course these proposals chart is a troubling one. It 
constitutes a high-risk undertaking that is not consistent with 
building a sounder fiscal structure in preparation for the 
budgetary storms that lie ahead. It also would be likely to 
lead over time to some radical changes in the role and 
functions of the federal government.

Key Criteria by Which Social Security Reform Proposals Should be Judged

    In their book Countdown to Reform, Henry Aaron and Robert 
Reischauer discuss four criteria for assessing Social Security 
reform. I think these four criteria provide a sound basis for 
such assessments. I also would add a fifth criterion--restoring 
and maintaining program solvency in a fiscally disciplined 
    Boosting National Savings and Economic Growth--the 
Congressional plans fall short here. The on-budget surpluses 
would be devoted to tax cuts that will primarily increase 
current consumption. Devoting a portion of the on-budget 
surpluses to the Medicare trust fund and using those funds to 
reduce the publicly held debt, as well as devoting a portion of 
the surplus to Universal Savings Accounts that are saved rather 
than consumed, would increase national savings more than using 
these surpluses for tax cuts. If Congress in its wisdom rejects 
placing more monies in Medicare or the Universal Savings 
Accounts, it would be better to place these surpluses in the 
Social Security trust fund and use them for debt repayment than 
to use them for tax cuts.
    Adequate Benefits that are Equitably Distributed and 
Represent a Fair Return--Individual account plans generally 
result in a less progressive distribution of benefits than 
Social Security does. For example, Aaron and Reischauer's 
analysis of the Feldstein plan finds it would boost government-
funded retirement income several times as much for more-
affluent workers than for low and moderately-paid workers.
    One frequently hears the argument that diverting resources 
to individual accounts helps everyone, because such accounts 
yield much higher rates of return than Social Security. This is 
not correct. A recent Center paper by Peter Orszag summarizes 
and puts into layman's terms a recent and important set of 
papers by economists John Geanakopolos, Olivia Mitchell and 
Stephen Zeldes. The major finding of the papers by these three 
economists is that it is advance funding that increases rates 
of return, not individual accounts. Advance funding will raise 
rates of return whether it is provided through individual 
accounts or through Social Security.
    The provision of funding that exceeds what is needed to pay 
current benefits, often termed ``partial advance funding'' when 
referring to Social Security, raises the rate of return on 
contributions because such funding can be invested at the 
market rate of interest; by definition, none of it is needed to 
pay current benefits. Since the market rate of return is higher 
than the rate of return on existing Social Security 
contributions, and since each dollar of additional funding can 
earn the market rate of return, additional funding secures a 
higher rate of return than existing contributions do. This 
higher rate of return can be captured by channeling the 
additional funding through either the trust fund or individual 
    A corollary of this point is that creating individual 
accounts out of existing Social Security payroll tax 
contributions, without any additional advance funding, does not 
raise the rate of return. If individual accounts are created 
out of existing funding, the benefits that current workers and 
retirees have accrued under Social Security must still be paid. 
That drives the overall rate of return back toward its current 
level under Social Security. It is the additional funding, not 
the individual accounts themselves, that is crucial to 
producing the higher rate of return.
    As Geanakopolos, Mitchell, and Zeldes show, the statement 
that individual accounts yield much higher rates than Social 
Security is incorrect. Such a statement is based on an invalid 
rate-of-return comparison. That Geanakopolos, Mitchell, and 
Zeldes are correct is borne out by the work of the Social 
Security actuaries in analyzing the three very different plans 
advanced by Members of the 1994-1996 Advisory Council on Social 
Security. The three plans adopted very different approaches to 
individual accounts from no individual accounts (under the 
Maintain Benefits plan) to relatively large individual accounts 
(under the Personal Security Accounts plan). But despite the 
sharply different treatment of individual accounts in the three 
proposals, their estimated rates of return are very similar. 
Consider, for example, an average two-earner couple born in 
1997. According to projections made by the Social Security 
actuaries and published in the Advisory Council report, the 
real rate of return for such a couple would be:
     Between 2.2 and 2.7 percent per year under the 
Maintain Benefits plan, depending on the share of the Social 
Security Trust Fund invested in equities;
     2.2 percent per year under the Individual Accounts 
plan; and
     2.6 percent per year under the Personal Security 
Accounts plan.
    In summary, the simple argument that individual accounts 
necessarily provide higher rates of return than Social Security 
is not valid. This argument rests on computations that either 
mistakenly count the cost of Social Security benefits that must 
be paid to current retirees as costs only under Social Security 
and not under a system of individual accounts or 
inappropriately compare the return on additional funding for 
individual accounts to the return on existing contributions to 
Social Security (or commit both errors).
    Analytically sound comparisons also should reflect risk and 
administrative costs. Individuals generally dislike risk; a 
much riskier asset with a slightly higher rate of return is not 
necessarily preferable to a much safer asset with a slightly 
lower rate of return. Administrative costs are also important; 
all else being equal, higher administrative costs reduce the 
net rate of return an individual receives. When these factors 
are taken into account, the supposed advantage of individual 
accounts in providing higher rates of return diminishes further 
and may even be reversed, given the higher administrative costs 
associated with individual accounts than with Social Security.

                        Protection Against Risk

    On one level, the Feldstein plan does provide ample 
protection against risk because it guarantees all participants 
a benefit as large as the Social Security benefits promised 
under current law. However, the plan is likely to undermine 
political support for the Social Security program as we know it 
today. Because people would seem to be paying substantial 
payroll taxes to Social Security and getting little back from 
it, Social Security would likely appear to much of the middle 
class and more affluent segments of the population to be a bad 
deal. It would seem to provide them a very poor rate of return 
compared to what there private accounts were paying. These 
disparate rates of return would partly reflect the fact that 
the Social Security trusts funds would bear all of the burden 
of financing the benefits of workers who had already retired or 
worked for many years before the individual accounts were 
established. The trust funds also would bear all of the burden 
of providing more adequate benefits to low-income retirees, 
low-earning spouses and divorced women, and covering widows, 
the disabled and the children of disabled and deceased workers. 
Although not obvious to many workers, a sizeable portion of the 
Social Security payroll tax is essentially an insurance premium 
for the disability and life insurance protection that Social 
Security provides. The private accounts, by contrast, would 
bear none of these burdens, which would enable them to appear a 
better deal to the average worker.
    Also a clawback or a tax or an integration factor (whatever 
it is called) of 75 percent to 90 percent is politically 
unsustainable. It is unlikely that you can give the American 
people accounts which they manage and which public officials 
say are theirs and then take almost all of the accounts back 
when they retire. Lowering the ``clawback'' percentage, however 
would require deeper cuts in Social Security benefits, 
increased transfers from the rest of government to Social 
Security, or deficit-financing. Finally, as discussed earlier, 
a Feldstein-type plan poses substantial risks for the rest of 
government and for fiscal integrity.

Administrative Efficiency

    The Feldstein plan would be complex and costly to 
administer. How costly would depend upon details of the plan. A 
recent study of the administrative costs of privately managed 
individual accounts in the United Kingdom shows that more than 
40 percent of the their value is consumed by administrative 
fees and annuitization and other costs, a figure that is 
significantly higher than has been acknowledged thus far in the 
debate in the United States. What this experience in the U.K. 
vividly illustrates is that if individual accounts are created 
in the United States, a decentralized, privately managed 
approach (as distinguished a Thrift Saving Plan-type approach) 
could carry a variety of dangers.
Restoring and Maintaining Program Solvency in a Fiscally 
Disciplined Manner

    A key question in assessing reform is whether 75-year 
solvency has been restored and whether it is maintained. The 
President's plan receives high marks for its emphasis on 
reducing the public debt.
    Lowering interest burdens is one of the best things we can 
do for younger generations. It increases our ability to meet 
our Social Security promises. The interest savings alone from 
this proposal (as a percentage of GDP) would more than offset 
the increase in Social Security costs that will occur under 
current law over the first half of the next century. The 
Administration's plan also envisions that the half of the 
shortfall not closed by general-fund transfers be closed, in 
whole or in large part, through more traditional methods. The 
President has called for the specific changes to be identified 
and agreed upon through bipartisan negotiations. To reinforce 
this strategy, the Administration wants to ``Save Social 
Security First''; it proposes that the increased discretionary 
spending and the USA accounts contained in its budget proposal 
not be created until Social Security solvency is restored.
    In my opinion, both plans--the Administration's (insofar as 
specifics have been provided) and the Feldstein type approach--
fall short on the fiscal discipline test. Under the 
Administration's approach, the massive infusion of general 
funds, if not tied to structural reforms in Social Security, 
might encourage policy-makers to avoid the needed structural 
reforms in Social Security (i.e. reductions in benefits and 
increases in revenues). Indeed, the crediting the 
Administration has proposed coupled with a higher level of 
trust fund investments in equities than the Administration has 
proposed could make the Social Security program solvent over 75 
years without any structural changes. In my view, the transfers 
the Administration proposes need to be conditioned upon making 
the structural changes to close the full 75-year financing gap.
    However, the Feldstein type plans fails the fiscal 
discipline test to a much greater extent. Promises to the 
elderly would be increased and there would be massive infusions 
of general revenues. There are no structural reforms and 
revenues are not explicitly increased. As I have argued 
earlier, this will cause severe fiscal pressures down the road. 
In addition, as a result of the combination of a Feldstein-type 
plan and the proposed tax cut the publicly held debt would not 
be reduced very much and therefore the interest burden on our 
younger generations would remain high. Finally, while it is 
assumed that a portion will be invested in equities, the manner 
in which this is done (compared to investment of the trust fund 
in equities) is likely to be costly and inefficient, especially 
if the individual accounts are privately managed.

  A Brief Description of a Fiscally Disciplined Alternative Framework

    Let me briefly describe an alternative framework:
     Recognize reality and adjust the discretionary 
caps for fiscal year 2000 upward so that the 13 appropriation 
bills can be enacted.
     Transfer to Social Security or Medicare some 
portion of any remaining on-budget surpluses, which would 
result in further reductions in the publicly held debt.
     Delay enactment of any substantial tax cuts or 
substantial new spending for the out-years until the Medicare 
and Social Security programs have been strengthened and there 
is a better sense of how much of the on-budget surplus safely 
can be used for tax reductions.
     In addition to any transfers from the on-budget 
surplus, further transfer to the Social Security trust fund are 
appropriate to the extent that Congress is unwilling to grant 
the authority to invest up to 50 percent of the Social Security 
reserves in equities (a smaller percentage than state and local 
pension funds invest in equities) under the management of an 
independent board. To the extent that such authority is not 
granted, general revenue transfers to compensate the trust fund 
for this lost income are appropriate. This policy (or better 
yet the actual investment of 50 percent of the trust fund in 
equities) would close slightly more than 50 percent of the 75-
year financing gap. (This proposal is described in more detail 
in testimony I provided earlier this year to the Senate Special 
Committee on Aging.)
     Close the remainder of the solvency gap by other 
structural changes in the Social Security program.
     Reduce the publicly held debt to zero by walling 
off the Social Security surpluses in a manner that precludes 
their being used for new tax reductions or spending increases. 
These surpluses should be used solely for Social Security 
solvency and debt repayment. A properly designed lock-box (that 
automatically adjusts for changing budget estimates due to 
economic and technical changes in estimates) employing a 
revised pay-as-you-go rule would be the most appropriate 
mechanism for accomplishing this. This pay-as-you-go rule 
should be enforced with a both a sequester and a 60-vote point 
of order. The bill announced yesterday by this Chairman is a 
significant improvement to the lock-box mechanisms being 
discussed on the Senate side. We would, however, suggest 
allowing a majority rather than a super-majority vote to waive 
the points of order that the bill establishes during recessions 
and wars.
    In conclusion, Mr. Chairman, you consistently argued during 
the welfare debate that the states were doing the right thing 
and the federal government should take its cue from what the 
states were doing. I believe, Mr. Chairman, that in this Social 
Security debate, the federal government should adopt two 
policies from the states. One is that 50 to 60 percent of state 
pension funds are invested collectively in equities. Second, if 
states have learned how to set aside their pension funds and 
not spend or give them away in tax cuts, the federal government 
should be able to do that as well.


    Chairman Shaw. Wendell, I thank you for your compliment, 
but I learned a long time ago, with great respect to you, sir, 
beware of liberals bearing gifts. [Laughter.]
    Mr. Enoff.


    Mr. Enoff. Thank you very much, Mr. Chairman. Mr. Chairman, 
Mr. Matsui, Mr. Collins, Mr. Cardin, it is a pleasure to be 
back here, and I thank you for the opportunity to be here. And 
I thank you for continuing to pursue this issue, because I 
think a lot has been accomplished in the discussions over the 
last couple of years, I will say.
    In my written statement, I have listed 12 principles that I 
outlined in 1997. And these are principles that I believe 
should be used in coming up with the answer to Social Security 
reform. They are principles that have been developed in my 30 
years of experience, working with the Social Security 
Administration in the U.S., and that have been confirmed in the 
5 years that I have been working in many foreign countries on 
Social Security reform issues.
    I have been privileged to work in 18 countries, and to 
study reforms in several others. And I will say that there is 
much to be learned from other countries, even though the 
situations are different. There is much to be learned--both 
good and bad--from the experiences, and I think we should take 
that into account.
    As I said in my written statement, and I will say again, 
the present Social Security program has served our Nation well 
in the 60 years that it has been in existence.
    However, I believe the time has come for basic changes in 
the program to reflect the economic, social, and political 
situation in our time, and to take us into and through the next 
century. I think we should look at this as if we have the 
opportunity to design the program from its very inception, and 
I think even those who would say we should stick with the 
current program would say that starting today they would not 
design the program as it currently is. I would just like to 
briefly summarize those 12 points. You have heard most of these 
in various parts of the testimony already this morning.
    First, make sure that the reform has broad, bipartisan 
    Second, protect current beneficiaries and those near 
    Third, take extra care to protect long-term, low-income 
workers and to give them the opportunity to have a say in their 
own retirement.
    Fourth, regulate carefully, but allow some flexibility.
    Fifth, educate the public not only about the reforms, but 
about the current program, and why it is being changed. There 
is not enough known about the current program.
    Sixth, give priority to the long-term security of American 
workers, not to short-term fixes that take us through the next 
10 years or whatever.
    Seventh, honestly discuss the cost of reform and what it 
would take to fix the current program. And I think that was 
brought out earlier in testimony.
    Eighth, give workers a say in their retirement investment. 
And I want to say that that is why I think individual accounts 
are important. I think that young people want to have some say. 
I think that will have to be restricted in some ways. And I 
will be glad to elaborate on that. But I think people want to 
have a say, and I think when they have that say, experience 
shows that people will put more into those accounts and save 
more. And that leads to another point. We should--whatever we 
do in reforming the program, we should try to increase the 
savings rate in this country.
    Tenth point: reform the retirement program by itself, and 
then look separately at the disability and survivors program 
for any changes that want to be made.
    Eleven, proceed expeditiously to design and carefully to 
implement. A lot has been said today about implementation. 
There are some potential pitfalls. But it can be done. I think 
what has to be done is a decision as to what you want and then 
some careful looks at how to implement that.
    And the final point I would make, try to simplify the 
program if it is possible. And we have heard many potential 
proposals that I have a hard time understanding, and I do not 
claim to be the brightest person on this Earth, but I have 
spent a lot of my years involved in Social Security programs. 
And I think it would be nice if the average worker would 
understand what they are paying for and what they are going to 
get back and be able to calculate their benefit on their own.
    Thank you very much. I would be pleased to try and answer 
any questions.
    [The prepared statement follows:]

Statement of Louis D. Enoff, Enoff Associates, Sykesville, Maryland; 
and Former Acting Commissioner, Social Security Administration

    Mr. Chairman and members of the Sub-committee, thank you 
for the opportunity to appear before you today and thank you 
for continuing to pursue this most important topic. When I 
appeared before this subcommittee in September of 1997, I 
outlined eleven principles which I believed should be adopted 
in designing reform of the US Social Security system. These 
principles were based on my thirty years of experience in 
various technical and executive positions with the US Social 
Security Administration and my experience since 1993 studying 
and working on social security reform in several foreign 
countries. Looking back on these principles a year and a half 
later, I find that they are still valid. Actually I have added 
one principle, to make and even dozen, which was implicit in my 
original list, but which I now believe should be explicitly 
stated. That principle which I have placed number twelve in my 
list is to: Develop a broad bi-partisan consensus on the basic 
design of Social Security Reform. The discussion and debate 
over the past eighteen months has confirmed and the twelve 
principles. That discussion and some experience in other 
countries has convinced me that the broad bi-partisan consensus 
is needed so that changes made to our Social Security program 
are changes that will take root and be allowed to develop over 
a period of years and not be drastically changed by a change in 
political leadership in either the legislative or executive 
branches. Social Security programs are vital to the well-being 
of the citizens in any country, but these are programs which by 
design take years to fully develop and to deliver promised 
benefits to future retirees. It is important that carefully 
designed program changes be allowed to fully develop before 
they are substantially modified. Constant changes in program 
design serve to confuse the participants and to prevent 
projected effects from happening.
    I have said before and I will say again, our current Social 
Security program in the US has served us well over the almost 
60 years of its operation. However, it is not designed to take 
us into and through the next century. Much has changed in the 
years since this program was designed and it is time for some 
basic changes in the program These should be carefully thought 
through and modeled before implementation. And the 
implementation plans must be carefully considered and 
implemented. Faulty operation of a social security system can 
be as critical as faulty design. My personal proposal would be 
to leave a basic pay-as-you-go defined benefit plan as a first 
tier and to add to that a funded mandatory defined contribution 
plan as a second tier. I believe that this approach gives the 
best of both worlds and allows a separate third tier to 
supplement the first two tiers on a voluntary basis for 
individuals. Implementing these changes will require careful 
and deliberate planning and timing. There is also a need to 
plan and implement several related programs to encourage older 
workers to stay in the work force longer and to develop 
retraining efforts to help workers in some occupations transfer 
to less physically demanding vocations.
    I have listed below the twelve guiding principles which I 
believe will lead to a highly successful redesign of the US 
Social Security program. The list is not in priority order. 
While some principles are more important than others it is 
difficult to give them an absolute rank. They all work together 
to complement the whole package.
    1. Give Priority to the Long-term retirement security of 
American workers. Short term budget considerations are 
obviously important. Using so called surpluses to finance some 
or all of the transition cost to a funded program could provide 
a tremendous boost to making the needed changes. However, we 
must look at the long term picture. The needs of workers who 
are just now entering the work force should be considered. Just 
tinkering around the edges of the current program to fiscally 
sustain it for another ten or twenty years is not really 
dealing with the problem. If anything, a short term fix will 
only serve to further undermine workers' confidence in the 
program. Even the most ardent supporters of the current program 
agree that they would not design the program as it is currently 
designed if they were starting anew today.
    Short term fixes can work for a time, but in the final 
analysis, tackling the long term issues are what will win the 
support of the workers. We see this in approaches taken in 
Sweden, Argentina, Chile, the United Kingdom and some of the 
recent reforms in Central and Eastern Europe.
    2. Protect current beneficiaries and those near retirement 
age. As has generally been stated in those proposals currently 
being discussed, current beneficiaries should be protected. The 
age at which those near retirement should be protected can vary 
a little depending on how much choice is offered to current 
workers about opting into a new plan. Until agreement is 
reached on the basics of a reform plan it is probably best not 
to try and specify at what age levels different options may be 
available. Decisions about the indexing of benefits should be 
resolved on the basis of facts and the resulting numbers 
factored into the calculation of future costs for the program.
    Concern for those already retired have stymied some efforts 
in developing economies and still are a cause for concern with 
the British system.
    3. Admit that there will be a cost to transition from the 
currently underfunded program. There are costs to transitioning 
from a strictly pay-as-you-go program to one that includes 
funded individual accounts. There are costs for the transition, 
building up funds, as well as for creating the necessary 
administrative structures. Both of these sets of costs will be 
more than recaptured in time. The question that needs to be 
addressed is over what period of time these costs should be 
spread and who should participate in paying for them We should 
also clearly and carefully point out what the costs would be to 
try and preserve and fix the existing program.
    Transparency is one of the most desirable traits of a 
social security system. Countries where the government has 
attempted to hide the true costs of social insurance programs 
have either seen these programs fail completely or caused such 
distrust by the workers as to feed the underground economy in 
an effort to avoid what are seen as unfair contributions.
    4. Work at simplifying the program The current program 
started with a rather complex benefit formula which has become 
more complex over the years. Average workers have a difficult 
time computing their own benefit even if they have all of their 
records. Any simplification should serve to build or restore 
confidence of the workers in the program.
    5. Take extra care to protect long term low income workers 
from poverty. The US Social Security program has from its 
inception provided for a transfer of funds from higher earning 
workers to lower earning workers. This transfer is accomplished 
through weighting in the benefit formula. Although this 
transfer or welfare aspect of the social security program has 
not always been well understood, I believe that this principle 
is accepted by the majority of Americans and should be 
maintained. A flat rate benefit formula would enable this 
transfer to work even more transparently. However, care must be 
taken to ensure that these provisions do not result in 
unintended windfalls for workers who work intermittently or 
casually only as a convenience rather than out of need.
    The level of the basic benefit tier should be carefully 
determined considering overall economic and social 
considerations. Minimum requirements for this basic benefit may 
determine whether the level should be at or near the poverty 
level or higher to recognize the long term work effort and 
contribution of the workers. Means tested or taxation of 
benefit policy could be considered for preventing unintended 
    Some of the experience in developing countries shows that 
successful programs can be created for the higher income or so-
called formal wage sector while ignoring the less organized 
vocations and the self-employed. We cannot afford to exclude 
any category of workers from the protection afforded by a sound 
secure social security system.
    6. Design any reform to try and increase the overall 
savings rate in the US. The savings rate in the US is 
unacceptably low, having fallen even below zero in recent 
months. The current pay-as-you-go system does not add to the 
individual savings rate and may in fact detract from it. 
However, a two tiered system with a funded individual account 
has great potential to increase the individual savings rate by 
itself let alone the behavioral change that might cause 
individuals to save more once they see their individually owned 
accounts accruing to them or their heirs. One of the most 
crucial factors here is to increase the savings rate by low 
income workers. The ERA experience shows that lower level 
workers are simply unable or unwilling to participate even when 
tax incentives are offered. In this case an EITC type approach 
could be used to stimulate more savings activity by lower 
income workers and help them to begin to build equity for their 
future. I also think that the idea of earnings sharing should 
be further explored as a means of alleviating the low income 
status of older women. Experience in England and many of the 
Asian countries shows that formal mandated savings has actually 
had a positive effect on overall individual savings.
    7. Give workers some say in the level and investment of 
their retirement funds. Many of the current proposals to reform 
the current system call for an increase in the retirement age. 
While I believe this is desirable, I think we have more work to 
do in this area. Despite the current law provisions which call 
for the normal retirement age to be raised from 65 to 67 over 
the next few decades, workers continue to retire earlier. While 
most of these early retirements may be by individual choice, I 
continue to be concerned that we have not done enough to ensure 
that workers in physically demanding jobs are able to retire or 
be retrained at the age when the physical challenge becomes too 
great to continue with their lifetime vocation. The proposed 
two tiered system would offer at least some more choice in 
deciding when to retire. At the same time we need to develop 
efforts that will encourage workers to work longer.
    With regard to the choice of investments for individual 
accounts, I also think some choices need to be given. While 
markets have developed substantially over the last 60 years and 
individual workers are much more generally informed, I do not 
believe we can simply let each individual workers make their 
own choices on the open market. Experiences in other countries 
show that this can be very dangerous and also very costly. Yet, 
it is possible to develop a controlled set of options so that 
workers can make an informed choice about where to invest their 
individual accounts and yet be protected from unscrupulous 
practices or exorbitant costs.
    Some countries have given workers an option to stay in a 
government sponsored second tier or to opt to the private 
sector managed programs. Where this option has been left open 
it has sometimes lead to workers moving back and forth between 
these two options. The number of choices and options needs to 
be carefully considered so as to avoid this costly back and 
forth movement. This option has been discontinued in Argentina 
and they have seen no ill effects.
    8. Develop a comprehensive but reasonable regulatory 
framework to protect the retirement accounts of workers. While 
any person should be free to invest their own money as they see 
fit, this is a government program designed to guarantee a 
secure retirement for all workers. Such a mandatory savings 
program requires a higher degree of protection against 
unscrupulous practices and perhaps even against precipitous 
market fluctuations. The FERS and FEHBP programs offer some 
real life experience with market oriented programs that provide 
for extra regulatory precautions. I believe we can benefit from 
these experiences as well as the experiences of other countries 
in designing the initial framework for social security reform 
The efforts of the workgroup on reform implementation of the 
Center for Strategic and International Studies also offers some 
very sound and practical advice. In this area I believe that we 
should proceed carefully and allow the set of choices to be 
expanded as we gain experience.
    In England and Australia the initial regulations were not 
tight enough and allowed for several costly experiences. On the 
other hand, the kind of tight regulation seen in Chile or some 
other South American countries does not allow for the situation 
as it exists in the US economic sector.
    9. Educate the public about the principles and projected 
outcomes of the proposed reforms as well as the principles and 
projected outcomes of the current program. Accurate education 
of the public about the current program is sorely lacking. Too 
many citizens continue to believe that they pay their FICA into 
an account that is held for them to draw from upon retirement. 
Many other myths about the program continue to persist and as 
mentioned earlier, few existing workers are able to calculate 
their own social security benefit amount.
    I sincerely hope that a broad bi-partisan agreement on 
Social Security Reform can be reached soon. If it is, there 
should be included a provision to educate workers about the 
current program as well as the future program and why the 
changes were made. If for some reason this broad consensus is 
not reached soon, I would urge you to develop a bi-partisan 
education effort that could be carried out in order to try and 
develop a public consensus on this critical issue.
    10. Proceed expeditiously to Design and carefully to 
implement. While we are not in a crisis, time is of the 
essence. Each day of delay in correcting problems of the 
current program means additional costs. At the same time, we 
and other countries have learned that changes implemented 
incrementally are usually easier to accept and to implement. 
While there are potential administrative problems in 
implementing individual accounts, there is no question that it 
can be done and it can be done successfully.
    Experience in the United Kingdom is of particular value in 
looking at ways to finance and develop the administrative 
structure for administering individual accounts. Even with the 
benefit of the experience of other countries we should allow 
sufficient time to develop the necessary mechanisms. This time 
lag does not have to stall the reform process, but simply 
ensure reasonable implementation dates for the various program 
changes. This time lag will also provide an excellent 
opportunity for the public education effort discussed earlier.
    11. Design a reform of the Retirement program but consider 
separately the reform of the Disability and Survivors programs. 
The current Social Security Disability program has a number of 
substantial problems. These problems are relatively small when 
compared to the magnitude of the problems with the Retirement 
program and have more to do with administrative issues or 
return to work incentives than they do with the financing. The 
Retirement portion of the program should be redesigned on its 
own and any resulting effects (such as increased retirement 
age) should be considered for its effect on the disability 
program along with efforts to enable more persons with 
disabilities to fully participate in the economy.
    Likewise, the Survivors portion of the program is 
relatively small compared to the Retirement program. While some 
countries have opted to purchase group insurance from the 
private sector to meet the needs of families when the worker 
dies prematurely, these policies are often less than adequate 
especially for young families. Once a reformed Retirement 
program has been designed, a careful look at the Survivors 
program should be taken to ensure that benefits are adequate 
and any necessary adjustments made. We should not put at risk 
this vulnerable group of worker dependents.
    12. Ensure that adopted reforms have broad bi-partisan 
support. In several countries reforms have been implemented 
only to be substantially modified with the next change of 
government. This tends to lead to confusion by workers and a 
lack of confidence in the system Confidence of workers should 
be a hallmark of this nations retirement security program.
    As I said in my opening remarks, the past 18 months have 
only convinced me to a greater degree that properly designed 
reforms can be successfully implemented and well received by 
the population. No country has a perfect Social Security system 
and even if they did it would not likely fit into the economic, 
political, and social setting at this time in the US. I believe 
we can learn as much or more from the mistakes made by other 
countries as we can from the successes. The primary concern we 
must keep in mind is the need to keep the debate honest and 
straightforward. The public needs to understand the current 
program and why change is necessary. Then the consensus must 
develop about how to move our retirement security plans into 
and through the next century.
    Thank you again for the opportunity to be here today. I 
would be happy to try to answer any questions you may have and 
to work with you to see a successful solution of this most 
crucial issue.


    Chairman Shaw. Thank you. Mr. Enoff, what restrictions 
would you put on investments and what restrictions would you 
put on the investor. I am speaking now not of the worker, but 
who would you allow the moneys to go to for purposes of 
investment? And what type of investments would you require?
    Mr. Enoff. I think that at least in the initial stages, 
there would have to be very strict regulation on who could run 
a pension scheme. After all, we are mandating here savings by 
individuals, and I do not have a problem with having some extra 
regulatory authority over those firms; that they have to meet 
certain qualifications. And I think we could look at what has 
been done in other countries to kind of lay out a framework. I 
think the Federal thrift system has some pretty basically good 
guidelines that could be used as starters. I think that you 
would want companies to be involved in this where they would 
solely be pension investment funds for that purpose to protect 
those funds. That does not mean they could not have other kinds 
of activities going on, but they would have to isolate those 
pension funds. I think there should certainly be regulations 
that would limit the amount of investment they could have in 
equities; the amount that they could have, let us say, in 
foreign investments. There are some prudent-man guidelines that 
are used in different countries for provident funds and for 
other kinds of pension funds that we could use as a base. And 
as I say, for starters, I think we would probably have to limit 
the number of options that a person might have. But at least, 
they should have some option.
    Chairman Shaw. How broad-based would you require these 
investments to be?
    Mr. Enoff. When you say, how broad-based, you mean in terms 
of spreading them across equities and bonds and so forth? I 
think, and I have spent some time working with the CSIS Working 
Group on implementation, I think that you might have to have a 
kind of a joint fund until people buildup a certain amount of 
equity in order to make it administratively cost effective. And 
what I am saying there is that a person should buildup certain 
credits in a combined fund before they could go and chose an 
individual fund. Because, otherwise, the costs become 
prohibitive. And I do not think that is a big problem. They 
have worked that very well in the U.K. system--that part of it. 
They have had some problems in the U.K. system, so I am not 
saying we should adopt that wholeheartedly. But they gather the 
funds into one common account that is invested, and each person 
that is in that common account gets the same return for that 
period of time. So it can be done.
    Chairman Shaw. Mr. Matsui.
    Mr. Matsui. I think that Mr. Cardin could precede me since 
he was here a while ago, sir.
    Chairman Shaw. Mr. Cardin.
    Mr. Cardin. Thank you, Mr. Chairman. First, I want to thank 
all three of our witnesses. Mr. Salisbury, I think you raise a 
very good point, and that is the higher the rate of return, the 
greater the risk is going to be. And that is going to be the 
tradeoff. That is the obvious tradeoff, so we need to be very 
careful whether we have private accounts or we have collective 
investments to understand that there will be greater risk the 
more we want on rate of return.
    Mr. Enoff, I want to thank you for your service to our 
country, and I particularly appreciate our working relationship 
when you were Acting Commissioner. And I think it is impossible 
for us to do things to make things more simple, but I thank you 
for the suggestion. Whenever we get involved, it seems to be 
more complex.
    Wendell, I very much appreciate your testimony, because 
today's hearing is based upon how do we evaluate plans that are 
brought forward. And the Chairman has been--in his questioning, 
has been bringing up over and over again that what we do on 
Social Security has an impact on the overall budget. And I 
think you really brought that to focus; that we cannot just 
look at Social Security in a vacuum. We have got to look at the 
total budget, because we could easily solve the Social Security 
problem by taking 100 percent of the surplus, just put into 
Social Security, and I think under any of the projects will 
come out with dealing with the Social Security issues. But that 
is not the right thing to do for our Nation, and you point that 
    It is interesting, if you take a look at what we are doing 
today on the floor of the Congress, the budget itself, the 
general approach that the administration has taken is to take 
the Social Security-generated surplus and to pay down the debt, 
to make it more likely that we can meet our future obligations 
for Social Security. The Republican proposal appears to be to 
have that money reserved to be spent for private accounts that 
would help deal with our ability to meet the Social Security 
obligations in the future, because of the offsets from the 
private accounts and the Social Security system. But then the 
rest of the surplus, the administration has suggested that we 
use a significant part of that to protect Medicare, which is an 
existing commitment, and then make some modest improvements on 
the discretionary spending caps and a modest tax cut. Whereas, 
the Republicans are suggesting using the rest of it for a large 
tax cut, with unrealistic spending caps.
    So I think if you put that all in context, your concerns 
are real legitimate concerns of whether we are going to be able 
to meet the future needs of our Nation. Yes, we might deal with 
Social Security. We might be able to deal with long-term 
solvency of Social Security, but at what price? Is the price 
Medicare? And then we are not doing seniors any favor.
    The one part, I guess, I would disagree with your analysis 
is that seniors are going to be great under this or may come 
out OK under this because if they do not have Medicare, we do 
not deal with Medicare, then we are going to have a serious 
problem for our seniors. And nothing on the table here suggests 
that we are going to be able to deal with the Medicare 
concerns. The first witness made it very clear that Social 
Security is easy compared to the Medicare. Medicare is going to 
be a much more difficult problem for us to confront. So I guess 
I really just wanted to make the observations, give you a 
chance to respond to that. Yes, I want to deal with Social 
Security. I want to deal with it. I think we can deal with it 
this year. I think we can protect the current benefits 
structure. I do not think we need to raise taxes or reduce 
benefits. We have got to get a better rate of return to the 
system in a way that protects from manipulation by government 
investment. I think we can do that. But to just use this 
surplus, like it is not going to impact our budget in the 
future, that we can go ahead and just spend it--whether it is 
on private accounts or whether it is on tax cuts--does present 
a problem as to whether we will be able to meet our current 
commitments to our seniors--and Social Security and Medicare, 
as well as do what is right for all people in this Nation, 
whether it is education programs; whether it is health care 
programs; whether it is job training, and the many others 
issues that we have. I would be glad to give you a moment or 
two to respond to that.
    Mr. Primus. Well, thank you. You understood the testimony 
very well, or you probably understood it before I gave it. But 
I think you have to look at--I mean, governing is essentially 
about making choices. And what I was trying to say is that if 
you want individual accounts, you cannot do tax cuts and 
individual accounts. You have to make a choice. I am not a fond 
believer. I think we would do better doing it through a 
collective mechanism. We would get more for our money, and that 
is the right way to raise the rate of return. But you cannot do 
all three. I think we learned that in the eighties. I would say 
all that I was pointing out--your point about Medicare is 
absolutely correct; that if you did adopt a Feldstein-type 
approach, setting aside all the details, you are making bigger 
promises to the elderly in terms of cash retirement security. 
And my point is that I do not think we should make more cash 
retirement security promises to our elderly right now. We 
should fund the promises that we have made, both on Medicare 
and Social Security. We should not be increasing those promises 
and the Feldstein--so I am a conservative here, Mr. Chairman. I 
do not think we should be increasing those promises, and that 
is basically what happens under a Feldstein-type approach. And 
I think you can get the higher rate of return by doing it as 
the States are doing it. And there may be a little problem here 
and there, but I think, fundamentally, you can protect and 
isolate collective investment from political interference. And 
we all agree that right now the best thing we should do is 
reduce that publicly held debt. If we can get our interest 
burden down from 3 percent of GDP to zero, we have increased 
our capacity to meet promises in the future.
    Chairman Shaw. I knew we would get you sooner or later, 
    Mr. Collins.
    Mr. Collins. A new conservative. I am glad I am on higher 
ground. That is the reason I wear boots to protect my socks. 
    Mr. Enoff, it was a pleasure to listen to you, as you 
suggest that we should take the ``KISS'' approach, and that is: 
Keep it simple, stupid. Because I think we do have to keep it 
simple so that the people that we serve understand exactly what 
we will be doing and how we are going about as we save the 
Social Security system itself. And, you know, I try to do a 
little bit of this at home by telling people, you know, you 
already have an individual Social Security number. Supposedly, 
the funds that are deducted from your payroll check in the form 
of payroll taxes are some way tracked. So I think it would be 
just a matter of setting up another accounting system or using 
the current accounting system to actually establish an 
individual retirement account. And I think people would 
understand that. And, like you, I think people, too, would see 
that this is a system that is working. It is building something 
for me, and should have the flexibility to maybe put a few more 
dollars into it if they wanted to, not mandated to.
    And then you are leading into a retirement program, an 
actual individual retirement, rather than continuing this 
episode of trying to convince people that they are under a 
retirement system today. As an old-age pension program, but, 
truthfully, it is nothing but a social insurance program. So I 
really like your approach to that.
    Mr. Primus, you are a piece of work. I am going to tell 
you. You know, I understand where you are coming from on the 
budget. But maybe we have, and I know we do have a different 
approach to this thing. It is kind of like I told the President 
1 day, we have differences of philosophy; we will just get that 
over with. But that is not all bad, because, you know, you 
bring a different idea to talk about than I do. But I do not 
think that the budget should depend on the Social Security 
system or the revenues that come from payroll taxes.
    That is a whole different matter. And people at home do not 
think it should--in fact, people at home do not think that this 
Congress should do anything with their Social Security payroll 
taxes, but put them into a Social Security account, and make 
sure that they stay there. And I understand where you are 
coming from with the fact that, if we reduce taxes, we have the 
potential of maybe having a deficit again, unless we have the 
discipline to control spending; and that, too, is what I hear 
at home. Go back to the 1993 tax hike. I got more postcards 
mailed into me and given to me that said: Cut spending first. 
Do not raise taxes.
    And I tell you, I think it would be interesting, and I hope 
we can get to actually see how that tax increase of 1993, where 
we changed the marginal rates, and we actually, this Congress 
or that Congress, the 103d Congress increased the liability on 
Social Security benefits as far as taxes are concerned. I will 
have to see the number that shows over the next 10 years where 
we have set aside in the budget resolution some $800 billion 
that could be used for tax reduction, to see just what those 
increases of that year that tax bill actually would bring in 
over the same 10 years comparable to what the relief may be. I 
think you will see a lot larger figure than what will actually 
be given back in relief.
    You talked about giving the advice to my Chairman here 
about looking at these State programs. Well, the States do have 
programs, but they have true pension programs in their 50 
States. It is not a social insurance program that each one has. 
It is a pension program. And the investments are made by 
investment boards or the pension retirement boards from those 
States. They are not made by some central government here in 
Washington. I believe if the State retirement system sent their 
money up here for Congress to invest, there would be a lot less 
and a lot fewer people that would want to be a part of that 
retirement program, based on the track record of some of the 
things that happened here.
    But we appreciate you taking the time today and to come and 
give us your input and your philosophy and your side of the 
story. You know, I have got my side of the story, and I am 
sticking with mine, and I am sure you are going to stick with 
yours, and hope you have a good day.
    Mr. Primus. Can I just briefly respond, Mr. Chairman? I 
think, Mr. Collins, maybe we are not as far apart as you think. 
I mean, I also believe the Social Security system should be set 
aside; and that those payroll taxes should be just used for 
Social Security purposes. I think, if you want to establish 
individual accounts, you should do it outside the Social 
Security system and that those tax revenues should be reserved 
for Social Security and making future benefit payments in the 
    And I also think that the bill that the Chairman introduced 
yesterday, or announced yesterday, is a very good step in terms 
of a lockbox device to make sure that the Social Security 
revenues are used to pay down the national debt. And, you know, 
I would not have the escape clause. I do not think you should 
be using Social Security money to establish the individual 
    And so, if the States can do it, and they can set aside and 
fully fund--and I am just arguing for more advanced funding 
right now of our retirement system--if they can fully fund, 
surely the Federal Government, and all of the wisdom up there 
on the podium should be able to figure out a way to reserve it 
and not use it for either spending increases or tax cuts. I 
think that is what I am advocating. And I do not think there 
may be as much difference in philosophy as you initially 
    Mr. Collins. I can assure you there is.
    Mr. Enoff. Can I say something in this debate, because 
Wendell and I agree on advanced funding? But we stop our 
agreement, I think when we start talking about who ought to be 
investing that, and I, you know, I think the government should 
do those things that the individuals cannot do. And that is the 
way we ought to start this process. And I believe in the social 
insurance program. And I believe you can have a social 
insurance program that includes mandatory savings with 
individual accounts. There is nothing that is wrong with that. 
But I think it is question of when we started this in 1935, it 
was impossible to have individual accounts. But we have that 
opportunity now, and I hope we do not miss the opportunity to 
begin those individual accounts, and it should come out of 
somehow a part of the Social Security contribution.
    So, I mean, we are not that far apart maybe. Maybe we ought 
to focus on that, and we could solve the issue. But I think 
that is the difference. Who is the dependence on, whether we 
are going to have dependency on our own account or depend on a 
government account?
    Mr. Collins. Well, you know, I understand, and we are a 
whole lot closer together than I am with Mr. Primus over here. 
But you are talking about using the current payroll tax that is 
already coming out of every individual worker's paycheck rather 
than setting up another mandate that would increase the burden 
on those working people by taking more of their income and 
giving them as an ear of corn out there to plow harder to put 
more of theirs in, because many of them could not because of 
the low income not having the money to put more in. So I think 
it--we are a whole lot closer than Wendell and you and I are, 
but I thank you all for coming.
    Chairman Shaw. Mr. Matsui.
    Mr. Matsui. Thanks, Mr. Chairman. Lou, I was not here for 
your testimony, but were you suggesting a carve-out under the 
12.4 percent for individual accounts or were you suggesting it 
was over and above. I did not get it.
    Mr. Enoff. I think a carve-out is a part of the solution. I 
am not opposed, and I--you have been talking about Feldstein 
proposal, and I have not seen--I have been out of the country.
    Mr. Matsui. Well, I am not talking about that. I am just--
    Mr. Enoff. OK, yes. I would suggest that there be a carve-
out. And there may even at some point, looking at how you fund 
that--let's face it. We have got to fund the transition from 
where we are to where we are going. That is the beginning.
    Mr. Matsui. Right. How do we do that because, you know, Bob 
Rubin says that transitional costs, the unfunded part is $8.5 
trillion. I mean, it is pretty big numbers.
    Mr. Enoff. There is an expensive transition cost which you 
get back in the long run. You get it all back in the long run, 
because if you are going to increase the amount of return. I 
mean, I think everybody agrees on that, too. So it is a matter 
of how do we pay for that transition and who should pay for the 
    Mr. Matsui. I am not too sure if I agree with that 
conclusion. But, you know, that has been one of the problems, 
but I appreciate your testimony. And Mr. Salisbury, you 
probably do not remember this, but you did come to Sacramento 
for a health care conference in the early eighties, and I 
appreciated that. Well, he does remember everything, I tell 
you. It is amazing. But thank you for that.
    Wendell, let me ask you, you have studied Martin 
Feldstein's plan I understand, is this correct?
    Mr. Primus. That is correct.
    Mr. Matsui. You know it pretty well--about as well as 
Martin Feldstein knows it I guess.
    Mr. Primus. He keeps changing it, but I try to keep up.
    Mr. Matsui. Right. Let me ask you a couple of questions 
with respect to it. Assuming a 75 percent claw back, is that 
plan sustainable under the current budget situation we have 
    Mr. Primus. My understanding is that, again, and the 
actuaries have done this, that a 2-percent plan does not 
restore solvency to Social Security and would require 
substantial amounts of funding, and, again, the point of the 
testimony is if you spend it all on tax cuts, you do not have 
the moneys left to fund Feldstein even if you wanted to, 
because it takes about $80 billion or $90 billion a year; and 
it is a $2.9 billion cost over the first 25 years; and 
including interest, it is little over $6 trillion over the next 
24 or 25 years.
    Mr. Matsui. Yes, I thought my numbers were reasonably 
accurate--the $4.6 trillion or $4.7 trillion over 15, but thank 
you for helping me with that. And you know our surplus is only 
projected out for 15 years or so. So if we do not sustain a 
surplus beyond that, how does Feldstein fund itself. Do we have 
any idea?
    Mr. Primus. Well, he is----
    Mr. Matsui. I mean, that in perpetuity whereas the surplus 
is only projected for 15 years. I mean, I am trying to 
understand that.
    Mr. Primus. Right. He is suggesting that it gets funded out 
of the general fund. And, you know, I think, if you again, if 
you set your mind to it and tried to just make Feldstein work 
and set again the whole notion of tax cuts aside, you would 
have a better chance of trying to make a Feldstein plan work. I 
do not think--I still think there are problems down the road, 
because eventually the promises we have already made to our 
baby boomers, and we start to retire in about 2010, 2013, those 
deficit projections, which are now surplus projections head 
south. And there is considerable uncertainty--you know, a whole 
page of my testimony is devoted to this notion that those 
surpluses and projections, you know, assume we are not going to 
have a recession for the next 10 years, for example. I mean, 
the probability of that happening is not very great. And so we 
are building in, if the, again, the framework that I see in the 
House and Senate budget resolutions, I think spell disaster. 
You cannot do all of them.
    Mr. Matsui. Now, if you take the Feldstein basic plan, and 
let us say a 90-percent clawback, is that just another way of 
kind of avoiding government investment, but getting into the 
equity markets in order to get a greater return; but do you 
have the problem of the overhead and the fund maintenance 
    Mr. Primus. Yes, I think the elements of this debate, as we 
all agree there should be advanced funding, and we want to 
raise rates of return. Everybody can give lip service to that. 
The question is what is the best way of increasing the rate of 
return. Should we do it through a collective mechanism, where 
we do not have the administrative costs, and so forth, of 
setting up 150 million accounts. And I guess the point I would 
want to make, Congressman, is that there is political risk--a 
lot of people have talked about the political risk of the 
collective investment. But there is also political risk of 
individual accounts. That means--I will give you two examples 
is you never allow access to that individual account before the 
individual retires. I mean the question is could you, not like 
what you have done in IRAs and other retirement vehicles, say 
forever, we are going to protect that individual account, and 
it can only be used for retirement. That is a political risk of 
that approach. Another one is can you force them annuitization. 
I mean, do those plans require--I mean, Feldstein says, my plan 
requires mandatory annuitization. Well, when your constituent 
is in a hospice bed and you have said that $100,000 account is 
yours--or if the stock market is not doing as well--will you 
have the fortitude to say to that person, no that plan, we 
could only give you the 6 months of benefits or however long 
you live. I think those are difficult decisions. And what I am 
trying to emphasize is there are political risks both ways.
    Mr. Matsui. Last, Lou, could you tell me--and I am sorry, 
Mr. Chairman, I just want to follow up--you were saying that 
maybe you got a transition in terms of these individual 
accounts, because I guess----
    Mr. Enoff. Yes, sir.
    Mr. Matsui. I guess risk and, you know, sophistication of 
    Mr. Enoff. No, sir. It is not a----
    Mr. Matsui. Maybe I misunderstood you.
    Mr. Enoff. Just so I am clear. There is a cost to 
transition from a pay as you go to a funded program, whether 
you have individual accounts or not.
    Mr. Matsui. No, no, I understand that. But I sensed that 
you were a little concerned--am I mistaken about this, that you 
were somewhat concerned about the individual accounts, and you 
have said you may have to start off by kind of a larger 
    Mr. Enoff. Sure. Experience.
    Mr. Matsui. Experience.
    Mr. Enoff. And let me--yes, experience in other countries 
show that you can, in fact, keep those accounts and cause 
annuitization and that there is not a hew and cry by the 
population because what is the alternative. If the alternative 
to the current system as opposed to an individual account, even 
if I cannot touch it until I retire, it is my account when I 
retire and it goes to my heirs at that point, as long as that 
is well understood in advance. But I would like to say, talking 
about the Feldstein plan, the President's plan, neither of them 
address the question of getting people to work longer. And this 
is an issue that I am afraid is going to have to be dealt with. 
I mean, you look at the demographics that are pointed out 
everywhere. People are retiring earlier. They are not working 
longer, despite the fact that you have increased the retirement 
age to 67. Still, 70 percent of the people who take their 
Social Security take it before age 65. We need to do something; 
we need to focus on how to encourage people to work longer. 
That is not very popular. I realize most of us like to retire 
probably at 45, but that has got to be a focus of a solution. I 
think that if you do not deal with that issue, we are going to 
have people retired for over a third of their adult life. And 
you cannot build enough money to pay for that unless you 
substantially raise the amount you are putting in. You cannot 
get enough of a return, so we probably have to deal with that 
issue. I know it is not popular, but we are going to have to 
deal with it. And I suggest that we need to look at ways to 
help people transition from maybe a physically demanding 
occupation into one that is less demanding and look at some 
gradual retirement approaches and activities like that which 
will encourage people to pay into the system longer than they 
are collecting out of it. That is the point.
    Mr. Matsui. Well, you know the only way to do that is by 
having a greater penalty upon early retirement. And obviously, 
that is not politically sustainable.
    Mr. Enoff. It is not sustainable, and I am not sure we have 
done enough work to ensure that it does not hurt some people 
who we do not want to hurt.
    Mr. Matsui. Yes, absolutely.
    Mr. Enoff. And so I think it needs some more work.
    Mr. Matsui. I want to thank all three of you.
    Chairman Shaw. Mr. McCrery.
    Mr. McCrery. No questions.
    Chairman Shaw. Well, I want to thank this panel. It was 
certainly interesting. It is interesting to see how we all 
start coming together at some points, even though we disagree 
on the details. The more we study this program, the more you 
realize it is only about five or six courses of action that are 
even out there. And the question is just to select one. And the 
one I think that is least sustainable is doing nothing. So I 
think we are going to act, and hopefully, it will be in a 
bipartisan way. Thank you very much for your input.
    Mr. Enoff. Thank you.
    Mr. Primus. Thank you.
    Chairman Shaw. We are now adjourned.
    [Whereupon, at 12:50 p.m., the hearing was adjourned.]
    [Submissions for the record follow:]

                    David B. Lowry, Attorney at Law        
                          One Lincoln Center, Suite 530    
                                  10300 S.W. Greenburg Road
                                     Portland, Oregon 97223

A.L. Singleton, Chief of Staff
US House of Representatives
Committee on Ways & Means
1102 Longworth House Office Bldg
Washington, DC 20515

RE: Social Security Hearing 3/25/99

    Dear L.A. Singleton,

    I am a lawyer with a Social Security disability law practice. Here 
are some ideas on how to promote the solvency of the Social Security 
    1. Increase the numbers of working age taxpayers through a change 
in immigration law. Have the INS recruit citizens the way football 
coaches recruit players. Have the INS show up on college campuses 
around the world and recruit new citizens in the top 10% of their 
graduating classes, just as IBM or ITT would recruit employees. These 
people will be hard working, taxpaying citizens somewhere and it might 
as well be here.
    I note that some countries are already advertising for American 
retirees and if others can advertise for our old people, we can 
certainly seek out their young people.
    Let the bright, ambitious teeming masses yearning to come to 
America do so.
    2. Reduce the outlay of Social Security benefits by converting the 
cash benefit retirees receive into a tax deduction for those with 
retirement incomes of $100,000 plus from non-Social Security sources. 
This will cost the IRS a little and save SSA a lot.

    Yours truly,
                                             DAVID B. LOWRY



Statement of Cynthia Wilson, President, Retired Public Employees 
Association, Inc., Albany, New York

    As President of the Retired Public Employees Association, 
an organization of more than 80,800 New York government 
retirees and their spouses, I am writing to urge the Committee 
to make the financial protection of individuals, especially 
those with low and middle-level incomes, one of the major 
criteria to be used in evaluating Social Security reform 
    There are many ways of establishing the financial stability 
of the system, but there are few ways for the poor to obtain 
retirement income outside of Social Security. Therefore we 
recommend the rejection of any proposal
     that would push the already poor deeper into 
     that would decrease the income of those currently 
self sufficient to inadequate levels,
     that would cut support for the survivors of 
deceased workers,
     that would cut support for disabled workers and 
their families,
     that would force an increase in the costs of 
means-tested programs, such as SSI which would have to be 
expanded to rescue the victims of reform.
    The Social Security system was established and enlarged to 
assist the less fortunate in our society. It would be tragic if 
the structure were stabilized at the expense of those who need 
help the most.


                          Richard Weede Photography        
                              14935 Highland Valley Rd.    
                                        Escondido, CA 92025
                                                     March 22, 1999
Committee on Ways and Means
1102 Longworth HOB
Washington, D.C. 20515

Re: Social Security reform

    To whomever will listen:

    I must first apologize for any missteps as I try to give you my 
ideas for the reform of Social Security. This is the first time I have 
ever written to a committee and know nothing about correct protocol. It 
seems almost presumptuous of me to think that you have not already 
considered this thought, but on the other hand, how can I rile about 
the ``dumb things'' you do or don't do if I don't at least give you 
some help?
    Obviously, this is only a basic outline and will have lots of 
flaws, but if looked at in a positive manner, you may find a way to 
implement a similar program. This is not a near term fix, but could 
certainly solve the S.S. program of the future. Here goes:
    As of a certain date, give a $1000 tax refund to the parents of 
each newborn child. That money would not go directly to the parents, 
but to one of many pre-approved, well-established mutual funds. (The 
parents would choose from the list) That money could never be touched 
until the child reached 55,60,65 or whatever seems reasonable.
    The only exception to the ``no touch'' rule would be when that 
first ``funded child'' has a child. At that time they must roll over 
$1000 into a new fund for this next generation child. At this time the 
tax deduction method would no longer be necessary and the program would 
fund itself automatically.
    I am sure that you know that the $1000 would be worth the better 
part of a million dollars at retirement age. However, incentives could 
be added for the parents to add small monthly amounts to the basic 
investment for the first ten years which would greatly enhance the 
original investment.
    Of course, I realize this would only take care of retirement 
benefits, but that is what S.S. was meant to be, isn't it?
    What happens if the child dies? You can work on that. I can think 
of a number of scenarios, but they are not as important as the basic 
concept. There will be other glitches. Think positively and work them 
    Now don't tell me this would disrupt the entire stock market. It 
might be a real boon.

                                              Richard Weede